A belated post summarising our latest Economic Commentary.
I Overview
In the latest Economic Commentary we note that Scotland’s economy has recently flirted with recession with growth of 0.2% in 2015q4 – the latest data point – and
-0.1% in 2015q3. Scotland may yet fail to escape recession in the coming months as growth is set to slow further due to
- slow investment growth,
- the continuing effects of the fall in the price of oil on household incomes and spending,
- a general slowing in household spending as the rate of household borrowing diminishes, wage income growth is weak, increasing job losses, and house price growth is moderating; and
- a worsening demand for Scottish exports as global growth and growth in Scotland’s key export markets slows.
II Industries and sectors
When we examine the performance across different industries and sectors, we see that a continuation of the convergence in the pattern of growth between Scotland and the UK in the fourth quarter of last year.
- Scotland is now relying solely on the service sector for growth as the contribution of Construction, driven by infrastructure spending, has now peaked, albeit at a high level of activity.
- Slight negative growth in the production sector meant that the recession in the sector continued with negative growth having occurred in three successive quarters. Within production, manufacturing technically emerged from recession in the fourth quarter but manufacturing growth can only be described as weak.
- Moreover, even though the service sector registered growth of 0.3% in the final quarter of last year, UK services grew three times faster and performance in all principal private subsectors in Scotland is appreciably weaker than their UK counterparts. Financial services are especially weak and the weakness of business services growth has been exacerbated by the effects of the fall in the price of oil.
- These data continue to offer evidence of the continuing reliance of both the UK and Scottish economies on service sector growth and the failure to rebalance in favour of manufacturing which was the express desire of the UK Government.
III The labour market
The latest labour market data revealed a significant deterioration in performance as the job shedding associated with the consequences of the oil price fall and deteriorating export performance began to bite.
- In the quarter to March 2016 the numbers in work fell by 53,000 (-2.0%) to 2,578,000. The last time there was a fall in jobs of this scale was back in early 2010.
- Unemployment rose by 8,000 (+4.8%) to 169,000 with the rate rising to 6.2%, compared to 5.1% in the UK, a gap that is now the largest since mid-2004. Over the year, Scottish jobs fell by -45,000, a fall of -1.7%. Unemployment in Scotland rose by 2,000 over the year, or by 1%.
- The numbers inactive rose in Scotland in the quarter by 49,000 or by 3.1%, while over the year, inactive numbers rose by 59,000 (3.7%) in Scotland.
- As a result of this downturn in the labour market, by the end of the first three months of this year the gap between Scotland’s and the UK’s employment performance had widened considerably with Scottish jobs as reported in the LFS household surveys 0.9% above their pre-recession peak, compared to UK jobs which were 6.3% above peak.
IV Factors influencing future performance
- Household demand and fixed investment will continue to drive growth in Scotland but with the stimulus from household spending and fixed investment weakening.
- Household demand and fixed investment will continue to drive growth in Scotland but with the stimulus from household spending and fixed investment weakening.
- Both investment and household spending will continue to be badly affected by the continuation of the low price of oil and associated job losses affecting household incomes and spending.
- Household spending will be affected by the recent fall in the saving ratio ceasing as households possibly start to rein back their borrowing and spending. In addition, wage growth remains weak while the housing market seems to be weakening, which is also likely to have a detrimental effect on household spending.
- Fixed investment will be affected by the decline in onshore investment in the oil service industry and related activities as well as the slowdown in infrastructure spending and construction activity.
- It might also be the case that uncertainty about the outcome of the BREXIT referendum on 23rd June and its aftermath might encourage companies to postpone investment plans until the issue about Britain’s economic relationship with the EU is finally clarified.
- Net trade will continue to have a negative effect on aggregate demand. Scottish exports (including trade with rest of UK) in current market prices have been falling since 2014 and Scottish manufacturing exports to the rest of the world fell in real terms in the second half of last year. The rate of growth in Scotland’s main export markets is predicted to fall.
- Finally the continuation of the UK Government’s austerity programme means that there is little hope of a compensating boost to growth from this component of demand.
VI Forecasts
- Output
On GDP, we have revised down our forecast for this year from 1.9% in March 2016 to 1.4%.
- This downward revision is driven by slow investment growth, the continuing effects of the fall in the price of oil on household incomes and spending, a general slowing in household spending as the rate of household borrowing diminishes and a worsening demand for Scottish exports as global growth and growth in Scotland’s key export markets slows.
- We are forecasting growth of 1.9% in 2017 a downward revision to our March forecast of 2.2%, due to an anticipated weakening of both domestic and export demand for goods and services produced in Scotland compared to our March forecast.
- We are now forecasting 2018 and our prediction is that there will be growth of 2.0% as the economy returns to trend.
- Jobs
We have revised down our forecasts for employee jobs because of the deteriorating conditions in the Scottish labour market.
- The number of total employee jobs is still forecast to increase in each year with the number of jobs at the end of 2016 forecast to be 2,445,650, an increase of 1.2% during 2016.
- Our new central forecast is that the Scottish economy will add 28,650 jobs in 2016, down by around 8,000 from our March forecast, with a net of 39,450 jobs added in 2017, down by more than 7,000 from our March forecast. Jobs growth in 2018 is forecast to be 47,379.
- Unemployment
Our latest forecasts for the unemployment rate in Scotland for the end of 2016 is now 6.9%, with our forecast for this to fall to 6.7% and then 6.2% by the end of 2017 and 2018, respectively.
V Growth Policy
In this section of the Commentary we consider further the challenges facing the Scottish economy and turn to the question of policies to promote long-term growth.
- We note that the Scotland’s Economic Strategy published by the Scottish Government in March of last year is the latest of many growth strategies produced by Scottish governments since devolution.
- All of these strategies provide a strategic framework grounded in mainstream economic development theory, which essentially see economic growth as the consequence of productivity growth stimulated through the promotion of specific ‘supply-side’ change: improvements in innovation and R&D, enterprise, investment, competition, and skills.
- But all of these strategies, including the current one, were stronger on the ‘what’ of growth promotion with much less emphasis on the ‘how’.
- In other words, there needs to be more thought and debate on the operationalisation and implementation of the promotion of innovation, enterprise, investment and skills formation in Scotland. It is not new strategies the Scottish economy needs but clear insights and policy action on the implementation of Scotland’s Economic Strategy.
- In view of this, we welcome the recent creation of the new Economy Secretary post in the Scottish Government and particularly welcome the new Minister Keith Brown’s early initiative in instituting a review of Scotland’s enterprise and skills agencies. If this review is undertaken in a positive way to help enhance the operational impact of the agencies, it could mark the beginning of a process where strategy implementation moves centre stage in economic policy in Scotland.
Annex: Fraser of Allander Institute Forecast Tables
Table 1: Forecast Scottish GVA Growth, 2016-2018
|
GVA Growth (% per annum) |
2016 |
2017 |
2018 |
|
Central forecast |
1.4 |
1.9 |
2.0 |
|
March forecast |
1.9 |
2.2 |
n.a. |
|
UK mean independent new forecasts (May) |
1.9 |
2.1 |
2.3 |
|
Mean Absolute Error % points |
+/- 0.52 |
+/- 1.24 |
+/- 1.31 |
© Fraser of Allander Institute, June 2016
Table 2: Forecast Scottish Net Jobs Growth in Three Scenarios, 2016-2018
|
2016 |
2017 |
2018 |
|
|
Upper |
37,950 |
67,550 |
79,200 |
|
March forecast |
50,700 |
79,400 |
n.a. |
|
Central |
28,650 |
39,450 |
47,379 |
|
March forecast |
36,800 |
46,850 |
n.a. |
|
Lower |
19,400 |
10,200 |
16,400 |
|
March forecast |
24,250 |
31,200 |
n.a. |
© Fraser of Allander Institute, June 2016
Table 3: Forecasts ILO unemployment 2016-2018
|
ILO unemployment |
2016 |
2017 |
2018 |
|
|
|
|
|
|
Rate ILOun/TEA16+ March forecast |
6.9% 5.7% |
6.7% 4.8% |
6.2% n.a. |
|
Numbers |
183,850 |
181,050 |
168,050 |
© Fraser of Allander Institute, June 2016
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