Scottish Economy Watch

Scotland's Economic Growth

 

Using the latest data available from the Scottish Government we can examine Scottish growth over the last 50 years. This blog updates an earlier post in February 2012 here.

The key points are:

• Scottish GDP growth over almost 50 years is comparable to UK growth – a little lower in absolute terms at 2.3% per annum compared with 2.5%pa in UK.

 

 

•  Trend growth in GDP per head is 2.2% per annum, which is the same - actually slightly higher at the second decimal place - in Scotland. But this is largely due to faster population growth in UK.

 

 

• Mature developed economies tend to display similar trend growth close to 2%. See this interesting table from Thomas Piketty's website

 

• Small open economies do have scope for faster growth and decline due to significance of resource mobility e.g. capital and labour, into and out of the economy.
• But it is unrealistic to expect under any policy regime or constitutional arrangement, sustained growth of 3% to 4%.
• Absolute growth of 3% to 4% may be achievable through population growth but not growth in GDP per head.
• Higher population growth requires comparable growth in public services and hence public spending.
• So, such absolute growth rates would not make much inroads into reducing a high public debt burden.
• Only high sustained growth in GDP per head would achieve that and as the evidence shows such an outturn is unlikely.

FAI Economic Commentary - June 2014

 

The Institute's latest Economic Commentary on the Scottish economy, sponsored by PriceWaterhouseCoopers, is published here. 

In summary:

Overview

The Scottish economy is now enjoying a strong recovery. However, the Institute cautions that the recovery is subject to the risks of: a continuing unbalanced recovery; falling real wages; booming house prices in the London housing market, and deflation in the Eurozone. Nevertheless, the Institute has raised its forecasts from March and its latest economic forecasts for Scottish GDP are, for: 2014: 2.5% (up from 2.3%); 2015: 2.2% (down from 2.3%); and for 2016: 2.4%. Net job creation is forecast to continue and strengthen, while unemployment is projected to fall.

Recent Performance

GDP

• The latest Scottish GDP data for Q4 2013 show that Scottish GDP rose by 0.2% in the quarter, significantly less than the 0.7% rise in the UK.
• However, it is clear that the Grangemouth dispute was responsible for reducing GDP by about -0.4% in the Q4 2013, suggesting that the implicit growth of the Scottish economy in the quarter was about 0.6%, close to but a little less than UK GDP growth at 0.7%.
• When oil and gas production is removed, to ensure a like-for-like comparison, the respective Scottish and UK growth rates remain the same for the latest quarter but over the year UK growth rises to 1.8% with Scotland at 1.6%.  The long period of weak oil and gas production has resulted in the UK GDP - ex oil & gas - having a much stronger recovery from recession than Scottish GDP.
• Scottish GDP has recovered by 5.02% since the trough of recession while UK GDP - ex oil & gas - has recovered by 7.41% from its trough. So, by the final quarter of last year UK GDP - ex oil & gas - was -0.5% below its pre-recession peak compared to -0.9% for Scotland.
• Scottish services have now attained their pre-recession peak and stand at 0.3% above c.f. +1.2% in UK.
• Manufacturing GVA contracted in 4^th quarter by -2.2%. Grangemouth dispute played big role here. Now -7.2% below pre-recession peak c.f. UK -8.9%
• Construction still weak here -13.5% below PRP c.f. UK -12.5%.

 Labour Market

• In the quarter February to April 2013, employment rose by 0.6% in Scotland and 1.1% in the UK. In terms of numbers, jobs rose by 16,000 in the quarter, compared to a remarkable rise of 345,000 in the UK as a whole. Over the year, Scottish jobs rose by 48,000, a rise of 1.9%, while UK jobs rose 780,000, or 2.6%.
• During the quarter unemployment in Scotland, in a reflection of the jobs increase, fell by -7,000, or -3.6%, to 183,000, or a rate of 6.6%, while in the UK, unemployment fell more rapidly by -161,000, or -6.9%, to a rate of 6.6%.
• Scottish jobs as reported in the LFS worker surveys have now reached their pre-recession peak, which continues to be worse than the UK, where the jobs total is 2.1% above the pre-recession peak, compared to 0.2% in Scotland in the final quarter of last year.
• However, it is worth noting that the ONS employee jobs series for Scotland shows that there were 2,343,000 employee jobs in Scotland in the final quarter of 2013. This was an increase of 66,000 jobs from the end of 2012, but 137,000 jobs (5.5%) lower than the peak of employee jobs in Scotland in Q3 2008 (2,480,000).
• By January - March 2013 the employment population ratio in Scotland stood at -2.8% below the pre-recession peak. This suggests that there is still plenty of slack in the Scottish labour market. The evidence that the growth in employment is still sustained by the growth of part-time workers and the self-employed provide a further indication of slack in the labour market. Moreover, there are still a large number of part-time workers that cannot find a full-time job.

Risks

The Institute sees that there are four potential risks to a sustained recovery of the Scottish economy:

• a failure to achieve a balanced recovery (as between household consumption, business investment and export growth)
• weak or no growth in real UK wages
  
• an overheated housing market, especially in London and the South East of England and its potential impact on UK interest rates
• the risk of deflation in the Eurozone

 Balance

• The evidence suggests that the UK and Scotland are still a long way off from a balanced recovery.
• Investment does seem to be picking up and it is to be hoped that this will continue, because the prospects of a marked improvement in the net trade position with sterling high and the European economies weak, does not augur well.
• And while household spending is currently strong, its underlying determinants appear weak.

 Real wages

• A key reason for concern about the sustainability of household spending is that debt levels to income remain high and real wages are falling!
• Real wage growth needs to move into positive territory for the prospects of a sustained growth in UK household spending to be certain.
• One critical factor here is whether labour productivity can begin to grow strongly. Without a step-change in the rate of growth of productivity the likelihood is that the recovery - as the economy begins to approach capacity - will see rising nominal wages but little increase in real wages as the growth of product prices matches that of nominal wage growth.
• Yet, data suggest that real Scottish wage growth become positive in 2013 whilst UK growth has remained negative for the past three years. This could be due to a faster growth in labour productivity in Scotland than in the UK, but we have no up-to-date data on labour productivity on this matter. Nevertheless, the recent recovery in UK jobs growth has been faster than in Scotland whereas GDP growth has been more similar suggesting faster productivity growth here.
• So, on this basis, the prospects for Scottish household spending might be a little rosier than in the UK.

 Housing market

• Arguably, the biggest threat to the recovery in both Scotland and the UK comes from the housing market.
• House prices are rising at an annual rate of 8% in the UK but by 17% in London.
• Scotland’s house prices were largely flat over the year to March 2014 with growth of only 0.8%.
• We believe there is a strong case for the Bank of England to exercise its currently limited macro-prudential policy powers through its new Financial Policy Committee by seeking to curb high loan to income ratios. The Bank of England should not seek to raise interest rates largely on this account.
• Rising house prices are essentially a London and South East England phenomenon. In Scotland, house prices are hardly rising overall. So, it would seem inappropriate for the recovery to be dampened right across the UK for what is clearly a local or regional issue centred on London.

 Eurozone deflation

• The final obstacle to recovery is the risk of deflation in the Eurozone, with prices poised to begin falling, the Eurozone risks a decade or more of Japanese-style stagnation. 
• This would lower demand for imports and limit foreign investment and would be very damaging to any export recovery in both Scotland and the rest of the UK.
• ECB has started to loosen monetary policy but more needs to be done

 Forecasts

• We are forecasting growth in Scottish GDP of 2.5% in 2014, 2.2% in 2015, and 2.4% in 2016. This represents a slight increase for 2014 and a slight decrease for 2015 over our March 2014 forecast.
• Production and manufacturing continue to be the major sectors exhibiting the fastest growth in 2014, 2015 and 2016.
• Our forecasts for employee job creation are broadly similar to our March 2014 forecasts, with a slight upward revision for 2014 and small downward adjustment for 2015.
• On the central forecast, we are now forecasting that net jobs will increase by 43,100 in 2014, 42,900 in 2015 and 58,150 in 2016. Our projection for unemployment on the ILO measure at the end of 2014 is now 173,150 (6.4%).
• By the end of 2015, unemployment is now forecast to be 168,150 (6.2%) falling further to 157,200 (5.8%) by the end of 2016 as growth in the economy strengthens over 2015.

 

 

IMF was not wrong on Osborne's austerity

 

The IMF has sought fit to effectively apologise for seeking last year to encourage the Chancellor to relax his austerity measures. Yes, they got the strength of the UK recent recovery wrong, everyone did, even Osborne himself. The Chancellor had quietly started to relax the austerity programme after 2012 as Jonathan Portes and Simon Wren Lewis make clear.

What governed the IMF's views last year was the weakness of the UK recovery since 2010 and the subsequent largely austerity driven stagnation that resulted in the UK economy - its level of GDP - still below its pre-recession peak; worse than every major country except Italy as the chart shows.

No, Ms Lagarde there was no need to apologise. You and Olivier Blanchard, chief economist of the IMF, were simply doing your job.

No sign of growth in new business, or is there?

 

The latest Scottish new business statistics published by the Committee of Scottish Bankers (CSCB) today continues to show little sign of a pick up in new businesses in Scotland. I have graphed the latest data in the following chart:

Despite the recovery, the number of new businesses continues to fall. This should clearly give us food for thought. However, as I noted here, the CSCB data appear to conflict with the VAT registrations data, which are a trqditional proxy for new firms. Unfortunately, the VAT data are available only on an annual basis to 2012. A comparison of the two series is shown in the next chart:

The VAT data show a slight upward trend since the trough of the recession in 2009, whereas the CSCB shows a downward trend. In addition the VAT data show the a trend rise in the Scottish share of UK VAT registrations since 2004 which peaked in 2010 at 6.60% but has fallen since to 6.45% in 2012. The historic problem with the business birthrate in Scotland is still evident since we are still adrift of a population share of 8.3%.

And the CSCB data?

Maybe the data are too partial since they cover new business opening accounts with the main banks. Perhaps Scottish new firms are increasingly using using other banks and sources of finance: hence the continuing downward trend in the data despite recovery.

Scottish Jobs and the UK

Some time ago someone asked me in the context of the referendum debate: "How many jobs in Scotland depend on links with the UK?" I said: "I don't know but I can attempt to find out. But the harder question is determining how many of these jobs might be at risk if Scotland chooses to become independent."

So in a later post I shall look at the jobs in Scotland that can be said to be dependent on the UK.

In the next post I shall try and make an assessment of which and how many of those jobs might be at risk through the process of Scotland became politically independent.

Jobs dependent on the UK

We can identify 5 broad categories of jobs that depend on the UK in some sense. These are jobs in:

• Rest of UK owned/controlled companies
• Companies exporting from Scotland to the rest of the UK
• The reserved public sector, less financial institutions in current UK state ownership
• UK public sector contracts for Scottish companies, especially defence
• Scottish R&D in the HEI sector financed by UK grants

These jobs we can call the direct jobs dependent on the UK. But there are also further jobs that depend on the jobs that are dependent on the UK. These are the secondary jobs in local companies supplying the direct jobs in one or more of the above categories. They are obtained technically by applying Type 2 Employment multipliers at the appropriate sectoral level using the Scottish Government's input-output tables.

The grand table with source links and descriptions of the calculations is presented below

Source: Own calculations using the following

(1) http://www.scotland.gov.uk/Topics/Statistics/Browse/Business/Corporate/alltables Table 3

(2) BIS calculations based on Scottish Input-Output tables 2009 data, retrieved May 2013, http://www.scotland.gov.uk/Topics/Statistics/Browse/Economy/Input-Output/Downloads and http://www.scotland.gov.uk/Topics/Statistics/Browse/Labour-Market/BRES-Employee-Jobs-Sco

(3) http://www.scotland.gov.uk/Topics/Statistics/Browse/Labour-Market/TrendPublicSectorEmp

(4) http://ukdefencejournal.org.uk/what-impact-would-independence-have-on-scotlands-defence-industry/ 75% of jobs assumed to depend on MOD spending

(5) 9,034 research staff: active academics plus research fellows and assistants equals 12.1% of UK total. Assume at a minimum without UK R&D grants Scotland would have a UK population share at 8.3% - Source: http://www.universities-scotland.ac.uk/uploads/briefings/Research%20facts%20and%20figs(2).pdf

(6) Derived from 2009 Scottish Input Output tables by aggregation to appropriate sector http://www.scotland.gov.uk/Topics/Statistics/Browse/Economy/Input-Output/Downloads/IO1998-2009All

 

The source spreadsheets for these calculations can be accessed here: Download Business in Scotland 2013. Download Jobs in Sco-ruk exports 2009  Download Scottish I-O tables 1998-2009

Now this table must be viewed with great care.

First, there will be some, probably quite a bit of, overlap between at least two of the categories of direct jobs: in rUK owned firms and in companies exporting to rest of UK. Clearly, many jobs in rUK owned firms will be associated with export sales to rest of UK. We have no data for the overlap, so we take the share of employment that is in rest of UK owned firms in Scotland (18.7%) apply that to the estimated direct export jobs 247,000, giving 46,000, then reduce the jobs in rest of UK owned firms – 359,000 - by that amount. The adjusted – rounded - numbers are presented in Table 2.

Table 2: Scottish Jobs Dependent on UK adjusted for overlap

Type of Job	Direct	Secondary	Total
rUK owned firms	313,000	204,000	517,000
Exports to rUK	247,000	350,000	597,000
Other to UK	75,000	86,000	161,000
Total	635,000	640,000	1,275,000

 

There is a further problem with the estimates presented in Table 2: the estimated secondary effects are almost certainly too high. Where there is a large change in the demand for goods services, and labour in the economy prices and wages will adjust as well as output. In the event of a reduction in demand and loss of jobs prices and wages will fall and so the competitiveness of supplying firms will increase to partially offset the loss of demand. In our – the Fraser of Allander Institute's – analysis, in the June 2010 Economic Commentary,of the impact of cuts in the Scottish DEL under the austerity proposals of the new UK Government, a flex-price analysis led to a reduction in jobs which was about half – 51% - of the fall when prices were held fixed under the standard Input-Output multiplier approach.

Applying that adjustment uniformly across all categories to the secondary jobs in Table 2 we get Table 3

Table 3: Scottish Jobs Dependent on UK adjusted for price and wage change 

Type of Job	Direct	Secondary	Total
rUK owned firms	313,000	104,000	417,000
Exports to rUK	247,000	179,000	426,000
Other to UK	75,000	44,000	119,000
Total	635,000	327,000	962,000

 

So, with the adjustments in place, Table 3 tells us that almost 1 million jobs – 962,000 – depend on links to the rest of the UK. This is a clear indication, if anyone wanted one, of the extent to which the Scottish economy is integrated with the rest of the United Kingdom.