Fraser of Allander Institute - Economic Commentary
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Fraser of Allander
Institute
Economic Commentary
Vol 42 No 4Foreword
The past 12 months have provided both good news and Like many before them, this year’s finalists demonstrated
bad for Scotland’s economy – economic growth has exceptional leadership skills. Their vision and
picked up during 2018, but overall growth remains low. commitment, combined with ongoing investment in their
One reason for the low growth is a lack of productivity people, technology and other assets, has ensured they
growth. continue to run strong, sustainable businesses which can
adapt to ever-changing marketplaces.
This mix of fortunes is also evident in the latest of
Deloitte’s Power Up reports, Power Up: UK-Wide Growth. As we face the challenges ahead including the continuing
It showed that Scotland’s economy has only grown at uncertainty around Brexit, it is important that business
around half the UK average rate and while the country has leaders in Scotland continue to plan for the future.
outperformed the UK average in productivity growth over Similarly, it is important not to lose sight of the importance
the last 10 years, productivity growth remains low. of announcements such as the upcoming Scottish Budget,
detailing the Scottish Government’s spending and tax
The latest Power-Up report looked at many years of plans for the year ahead.
employment and productivity data to help identify where
Scotland can maximise opportunities by learning from the The Scottish Government’s use of income tax powers has
past, before combining this with the very real experiences certainly been the main focus of recent Scottish Budgets,
and views of current business leaders, educators, local and with the announcement in October’s UK Budget that
government officials and other stakeholders. the Chancellor intends to raise the higher rate threshold
to £50,000, from April next year, it is likely to dominate
One of the findings is that Scotland’s businesses need to once again.
collaborate further with educators and policymakers to
develop the vital skills required to harness productivity Scotland’s Finance Secretary, Derek Mackay, has
for regional growth. Another key finding is that Scotland’s indicated he does not intend to match this for Scottish
business leaders will need to remain open and agile to income tax bands, which apply to earnings and pensions
transformational opportunities, as digital strategies and for Scottish residents, and that will result in a noticeable
technology innovation continue to influence productivity difference in the tax paid between Scotland’s higher rate
gains in the short term. tax payers and those in the rest of the UK.
Our report also highlighted that Scotland needs more What impact this will have on investment and growth in
businesses of scale that are competitively positioned Scotland is the subject of much debate. However, it is
across international markets. important that Scotland is seen as an attractive place for
people and businesses. We have an ageing population,
Scotland can grow these businesses. Innovation and a shrinking working age population and it is vital for our
entrepreneurialism are embedded in Scotland’s roots, future that we do not deter people from choosing to come
standing businesses in good stead to respond to the to Scotland.
challenges ahead. This was reflected in the recent Summit
Entrepreneurship Awards which Deloitte was proud to There are no easy answers to how to improve Scotland’s
sponsor once again. productivity growth, our economic growth or how to
balance the nation’s books. As the country’s business
landscape continues to evolve, it will be important for
all leaders to think innovatively and plan differently, to
identify solutions from which everyone can benefit.
John Macintosh
Tax Partner
Deloitte
December 2018
Deloitte supports the production of the Fraser Economic Commentary. It has no control over its editorial content,
including in particular the Institute’s economic forecasts.
1 Fraser of Allander InstituteFraser of Allander Institute
Contents
Economic Commentary
3 4 5
Summary At a glance Outlook and
appraisal
6 8 11
Global economy UK economy Scottish economy
15 18 20
Scottish labour Latest Scottish Scottish Fiscal
market indicators Commission’s
forecasts
21 23 25
Our forecasts ‘No deal’ Policy context
For regular analysis on the Scottish economy and public finances please see our blog
www.fraserofallander.org
Copyright © University of Strathclyde, 2018.
ISSN 2046-5378 Economic Commentary, December 2018 2Summary
The vote on the UK’s EU Withdrawal Agreement will Given the Brexit debate, the Scottish Government’s
be one of the most significant in a generation. It upcoming Budget has received little attention.
has the potential to shape the future of the UK and
Scottish economies for decades to come. But the government faces a number of decisions
that will shape the direction of Scotland’s public
Whatever happens, it will not mark the end of the finances for years to come.
uncertainty. A vote in favour will see the UK enter
a near two-year transition process. But the most Will Mr Mackay choose to follow – at least in part
challenging issue – a future UK-EU trade deal – has – the decision by the Chancellor to raise the Higher
yet to be agreed. Rate threshold on income tax? Or will he take a
further decisive shift to differentiate Scottish and
Some will argue that a vote against will increase rUK income tax policy?
the likelihood of ‘no-deal’. Others argue that it
provides a last opportunity to secure a softer As a minority administration, what might be offered
Brexit. to secure parliamentary support? Will Scottish
Green Party backing lead to a more fundamental
In such times, any economic forecasts must come look at the funding of local government?
with major health warnings.
And what is the long-term strategy for public
What we can say with some confidence however, services? With the NHS on track to soon account
is that ‘no deal’ would be a substantial (negative) for around £1 of every £2 spent by the Scottish
economic shock. The Bank of England have set out Government, pressures on other budgets continue
a ‘worst-case’ scenario which could see the UK to increase. We have heard a lot about plans for
economy shrink by around 8% from 2019. priority areas of spend, but what about other areas?
To put that in context, that is around double the During the coming months of debate and
size of the recession Scotland witnessed during negotiations, the Scottish budget will no doubt play
the financial crisis. Whilst some people have second fiddle to Brexit. But we should not forget
questioned this analysis, even under a less the importance of the budget, not only because it
disruptive ‘no deal’, the Bank’s analysis suggests determines how much income and council tax we
that the slowdown could still be significant. all pay, but because of what it will tell us about
the long term outlook for public spending and tax
All this comes at a time when the Scottish economy competitiveness in Scotland.
had been showning signs of picking-up. Growth
in Scotland for the first six months of 2018 had
outperformed the UK as a whole. Fraser of Allander Institute
December 2018
In the event of a ‘smooth’ Brexit with a full transition
period, we expect growth to pick up. We have kept
our forecasts broadly unchanged on September
at 1.4% for 2019, followed by 1.5% for 2020 and
1.4% for 2021.
3 Fraser of Allander InstituteScottish growth forecast Unemployment forecast
We expect growth
to pick up but
remain below
2019 3.9% Job
down from Market
trend - even 4.2%
assuming a broad
based agreement
with the EU.
2020 3.9%
down from
4.3%
1.4% 1.5% 1.4%
1.4% 2021
4.1%
2020
2019 2021
Fraser of Allander Institute
At a glance
Chart: Scottish growth (since 2013) – year and quarter Table: Employment & unemployment rates, July - Sep 2018
3.0%
Employment (16-64) Unemployment (16+)
Scottish quarterly GDP growth
2.5% Year Year
Scottish annual GDP growth - Q on Q Rate (%) Rate (%)
Change Change
2.0%
Percentage change (%)
Scotland 75.0% ▼ 3.8% ▼
1.5%
England 75.8% ▲ 4.1% ▼
1.0%
Wales 75.0% ▲ 3.9% ▼
0.5% N. Ireland 68.5% ▲ 4.1% -
0.0%
UK 75.5% ▲ 4.1% ▼
-0.5%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2013 2014 2015 2016 2017 2018
Chart: FAI forecast Scottish economic growth range
4%
Forecast
Table: FAI forecast Scottish economic growth (%), 2019 – 2021
3%
2019 2020 2021
2%
GDP 1.4% 1.5% 1.4%
Annual GVA Growth
1%
Production 1.6% 1.7% 1.6%
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Construction 1.1% 1.1% 1.1%
Services 1.4% 1.4% 1.4%
-1%
-2%
-3%
Economic Commentary, December 2018 4Fraser of Allander Institute
Outlook and Appraisal
Whilst economic growth in Scotland remains below trend, it has picked-up in 2018 to its fastest pace
since 2014. However, businesses are increasingly nervous about the prospects for the UK and Scottish
economies in the light of the looming Brexit impasse and the potential political crisis it could usher in.
Chart 1: Scottish growth since 2013, year and quarter
Introduction
3.0%
Scottish quarterly GDP growth As we outlined in our last Commentary, growth in the
2.5%
Scottish annual GDP growth - Q on Q Scottish economy has picked up in recent times –
2.0% consistent with the forecast we set out this time last
Percentage change (%)
year. Chart 1.
1.5%
1.0%
Whilst activity remains below trend, it has certainly
been more positive than in recent times and has
0.5% helped unemployment to remain at a near historical
0.0%
low. Table 1.
-0.5%
But the outlook is dominated by one issue: Brexit.
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2013 2014 2015 2016 2017 2018 There remains a sense that no one knows where the
Source: Scottish Government ongoing political process will end: indeed, the range
of outcomes seems as wide as ever.
Forecasting any economic outlook in such times is
fraught with difficulties. We make no excuses for
Table 1: UK labour market, Jul - Sep 2018 saying that we can offer little certainty to where the
economy might go in the months ahead.
Employment Unemployment Inactivity
(16-64) (16+) (16-64) Whatever the outcome, it is far from apparent that
Scotland 75.0% 3.8% 22.0% the fog enveloping the near term outlook will roll
England 75.8% 4.1% 20.8% away to reveal a clarity that has been starkly absent
Wales 75.0% 3.9% 21.9% thus far.
N. Ireland 68.5% 4.1% 28.5%
Indeed, many critical elements may simply be
UK 75.5% 4.1% 21.2%
fudged, or more openly deferred, leaving uncertainty
Source: ONS, LFS for many more months, if not years.
In such times, building resilience into plans for
2019 and beyond is perhaps the most effective
strategy that can be undertaken at the current time
by businesses.
One of the most frustrating things about the Brexit
Table 2: Change in Scottish GDP relative to baseline of full EU debate – whether you agree or disagree with the
membership after 15 years decision – is that many important issues, such as
EEA FTA WTO this month’s Scottish Budget, are being side-lined.
UK (2018)* -2.5% -6.7% -9.3% But the decisions that Mr Mackay will take on tax,
SG (2018) -2.7% -6.1% -8.5% public spending and economic policy, will shape the
FAI (2017) - -4.9% -7.5% economic and fiscal outlook for years to come.
* Figures for the UK economy Source: Fraser of Allander Institute
It is therefore important that we continue to debate
and critique the choices that will be made.
5 Fraser of Allander InstituteTable 3: OECD & EU quarterly growth rates: 2017 to 2018 The global economy
2017 2018
The global economy has been in robust health for
Q1 Q2 Q3 Q4 Q1 Q2 Q3 over two years now.
UK 0.4 0.3 0.4 0.4 0.1 0.4 0.6
US 0.4 0.7 0.7 0.6 0.5 1.0 0.9
World GDP is estimated to have risen by 3.7 per
cent in 2017, up from 3.2 per cent in 2016. The IMF
Japan 0.7 0.5 0.6 0.2 -0.2 0.7 -0.3
forecast that it will remain at this – above trend –
Canada 1.0 1.1 0.4 0.4 0.4 0.7 0.5
level in 2018.
Euro Area 0.7 0.7 0.7 0.7 0.4 0.4 0.2
Germany 1.1 0.5 0.6 0.5 0.4 0.5 -0.2 However, as we highlighted in our last commentary,
France 0.8 0.6 0.6 0.7 0.2 0.2 0.4
most economists believe that growth has peaked (at
least in advanced economies).
Italy 0.5 0.4 0.4 0.3 0.3 0.2 0.0
Source: OECD Indeed, there is growing evidence of a slowdown in
many of Scotland’s key trading partners. Table 3. In
particular, output in the Euro Area rose by just 0.2%
– a four year low – over the summer.
Chart 2: Global manufacturing PMI’s: falling back in recent Significantly, the German economy contracted for
months the first time since 2015, driven in part by ongoing
10 challenges in car manufacturing, but also wider
World Advanced economies Emerging market economies
8
fragility in investment and household spending.
6
Indicators of activity across the global economy have
eased back. Chart 2. Some of this reflects a natural
Index, 2015 = 100
4 change in the economic cycle. However, there are
concerns that heightened political uncertainty could
2
turn a ‘soft-landing’ into something altogether more
0 challenging. Chart 3.
-2 Chief amongst these are the potential impacts
of rising trade tensions, led by the increasing
-4
2012 2013 2014 2015 2016 2017 2018 protectionist policies of the Trump administration.
Source: Thomson Reuters Datastream
World trade accelerated sharply in 2017 – to grow at
its fastest rate since 2011 – but there are signs that
this momentum is fading with recent trade disputes
taking their toll.
Chart 3: Global Economic Policy Uncertainty Index, 1997 - Oct Chart 4: Long-term impact of Brexit on Ireland’s GDP
2018
EEA CU FTA WTO
350 0%
-1%
300
% change from baseline in 2030
Economic Policy Uncertainty Index
-2%
250
-3%
200
-4%
150
-5%
100
-6%
Tariffs and customs
50
-7% Regulatory divergence
Service barriers
0 -8%
Source: The Department of Business, Enterprise &
Source: Economic Policy Uncertainty Innovation (DBEI), Irish Government
Economic Commentary, December 2018 6Chart 5: Stock market performance to Nov 2018, 2007 = 100 Of course, Europe faces its own challenges from
250 Brexit – nowhere more so than Ireland. Chart 4.
STOXX Europe 600
STOXX Asia/Pacific 600 The heightened risk around that global outlook has
200
S&P 500 spilled over into renewed volatility in stock markets.
Most major indices have seen falls in recent weeks.
Indices: Jan 2007 = 100
FTSE 100
150
The FTSE 100 is down around 10% on its May 2018
100
peak. Chart 5. Such volatility has some investors
speculating that the world’s major central banks
may put off plans to tighten monetary policy.
50
Closer to home, Sterling continues to trade at a
0 discount, driven by concerns over the UK’s long-run
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
prospects post-Brexit. Chart 6.
Source: Thomson Reuters Datastream
The FT reported in November that investors have
withdrawn more than $1tn from UK-focused equity
funds since the referendum – the highest outflows
since the financial crisis.
Chart 6: Exchange rates, $/€ to £, 2013 - Nov 2018
And in October, the UK market was rated the least
1.80
US $ to GBP
popular of 22 asset classes among fund managers in
1.70 a Bank of America Merrill Lynch survey.
Euro to GBP
1.60
The price of oil has entered ‘bear market’ territory.
In just over a month, Brent has plunged by around
US $/Euro to GBP
1.50
30% to below $60. Chart 7. Whilst fears of a global
1.40
slowdown have not helped, it is an oversupply that
1.30 has had the greatest impact.
1.20
This of course matters here in Scotland. The oil and
1.10 gas sector had just come through a difficult period,
1.00
with confidence returning. Chart 8.
2013 2014 2015 2016 2017 2018
Source: Thomson Reuters Datastream
Whilst the low oil price will come as a blow to many,
the mood in the sector remains confident with most
contractors and operators better prepared for a
lower break-even price.
Chart 7: Price of oil, 2013 - Nov 2018, US $/BBL Chart 8: Optimism in North Sea , 2004 - May-Oct 2018
120
100
80
100
60
40
% net balances
80 20
0
US$ / BBL
60 -20
-40
40 -60
Business optimism in UKCS compared to a year ago
-80
Business optimism in UKCS over next year
20 -100
0
2013 2014 2015 2016 2017 2018
Source: Thomson Reuters Datastream Source: FAI / AGCC
7 Fraser of Allander InstituteChart 9: UK economic growth compared to (best & worst) G7 The UK economy
economies
4.0% Following a period of relatively strong growth in
EU Referendum
3.5%
2014 through 2016, the UK economy has slowed
significantly over the last couple of years. Chart 9.
3.0%
In late October, the OBR revised down their forecasts
GDP growth
2.5%
for GDP growth in 2018 to just 1.3%. Since then,
2.0%
figures have shown that growth picked-up over the
1.5% summer (+0.6%), boosted in part by good weather,
1.0%
the World Cup and recovery in sectors which had
Lowest G7 GDP growth
experienced a challenging start to 2018.
0.5% Highest G7 GDP growth
0.0%
Latest UK Data
This recovery was particularly pronounced in
Q1 Q2 Q3
2015
Q4 Q1 Q2
2016
Q3 Q4 Q1 Q2
2017
Q3 Q4 Q1
2018
Q2
construction, where output grew by over 2%.
Source: ONS & OECD It is over a longer time horizon that a clearer picture
of the true health of an economy can be assessed.
Chart 10: UK economic performance, 2008 - Q3 2018 This shows that even with these recent positive
figures, UK growth remains below trend with annual
1.5 6
growth of 1.5%. Chart 10.
Real GDP growth: quarter on previous year's quarter
1.0 4
It is therefore hard not to conclude that the ongoing
Real GDP growth: quarter on quarter
0.5 2
Brexit uncertainty has had an impact. The fall in the
0.0 0 pound has squeezed household incomes. Business
-0.5 -2
investment has arguably taken the biggest hit and
has contracted now for three consecutive quarters.
-1.0 -4
-1.5 -6
Of course, predicting where the economy ‘would
Quarter on quarter (left hand side) have been’ had a referendum not been called is
-2.0
Quarter on previous year's quarter (right hand side)
-8
fraught with difficulty. Chart 11.
-2.5 -10
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 What we can at least conclude is that those who
Source: ONS predicted a sharp recession immediately after
June 2016 were wrong, but so too were those
who suggested that leaving the EU would have no
negative impact. Chart 12.
Chart 11: Post-referendum performance relative to pre- and
post-referendum growth forecasts Chart 12: Weaker productivity forecasts for UK for next 5 years
2.5%
110
November 2016 forecasts
EU Referendum
Productivity forecasts (% change on last year)
108 October 2018 forecasts
2.0%
106
GDP (indexed, 2015/16=100)
104
1.5%
102
100 1.0%
Actual
98
BOE May 2016
96 0.5%
BOE Aug 2016
94
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 n/a n/a
0.0%
2015 2016 2017 2018 2019 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23
Source: Bank of England & ONS Source: Office for Budget Responsibility
Economic Commentary, December 2018 8Chart 13: Productivity performance pre and post financial crisis Interestingly, much of the explanation why both
in G7 the Bank of England and the Office for Budget
United States
Responsibility remain relatively pessimistic about
the outlook for the UK economy is not driven by
Japan
short-term factors, such as Brexit uncertainty
United Kingdom or even a more fragile and volatile global policy
environment.
Germany
France
Instead, it is driven by continued weak productivity.
It is this, more than anything else that is holding
Canada
back growth forecasts.
Italy
It is easy to see why the government’s official
0.0% 0.5% 1.0% 1.5% 2.0%
Growth of labour productivity per hour worked
2.5% 3.0%
forecasters continue to take a much more
Average growth, 1997-2007 Average growth, 2008-2018 pessimistic outlook for productivity given recent
Source: ONS & OECD performance. Productivity across developed
economies is much lower than pre-crisis but the
drop off in the UK is particularly pronounced. Chart
13.
Chart 14: OBR forecasts for the UK unemployment rate: currently At the same time however, the labour market
overly pessimistic
continues to perform much better than expected,
10
with unemployment consistently beating forecasts –
9
Chart 14. Indeed, there are increasing signs of skills
8
shortages and rising vacancies across sectors.
7
Unemployment rate (%)
6 Taken together, the outlook for productivity and
5 the labour market, means that there seems to be
4
little spare capacity to help growth pick-up beyond
3
current levels – Chart 15. Most forecasts predict
2
Latest
that the UK is operating at close to its potential or
1
Mar 2017 - Mar 2018 Nov 2011 - Mar 2014 sustainable level (the ‘output gap’).
Dec 2014 - Nov 2016 Jun 2010 - Mar 2011
0 It also means that whilst real earnings have started
to rise once again, the prospects for a substantial
Source: Office for Budget Responsibility pick-up in take-home pay appear remote. For many
households, the feeling of ‘austerity’ is likely to
continue for some time to come. Chart 16.
Chart 15: Output gap estimates, Q1 2008 - Q2 2018 Chart 16: UK real and nominal pay growth since 2007
6 6
Range excl. highest and lowest estimates Range of all estimates Nominal Regular Pay
5
Quarter on same quarter a year ago growth (%)
OBR estimate High (all estimates)
4 Real Regular Pay
High (excluding highest)
4
2 3
2
0
%
1
-2 0
-1
-4
-2
-6 -3
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jul-07 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Jul-18
Source: Office for Budget Responsibility Source: ONS
9 Fraser of Allander InstituteChart 17: UK Services, Construction and Manufacturing PMI Faced with an ongoing squeeze, it is no surprise
60 that borrowing amongst households is on the rise
58
once again. At the same time, the UK savings ratio
continues to remain close to record lows.
Balance of respondents (> 50 = expansion)
56
Most up to date business surveys point to growth
54
continuing, but at a slow pace.
52
The UK manufacturing PMI fell to just 51.1 in
50
October (well below market expectations and well
48 above 50 marks expansion). UK services PMI also
46
fell to 52.2. Chart 17.
Services Manufacturing Construction
44 The CBI’s Business Optimism indicator decreased
2016 2017 2018
to -16 for Q4 2018, the lowest reading since
Source: RBS, IHS Markit
immediately after the EU referendum.
At the heart of the slowdown in business activity is a
fall-off in investment.
Chart 18: Surveys of capacity pressures November’s Bank of England Inflation Report found
4
that, for Q3 2018, Brexit uncertainty was the single
3
largest factor weighting on investment plans. Chart
2 18. Other measures, such as Deloitte’s CFO survey,
1 have also found evidence of rising uncertainty. Chart
Survey indicators
0 19.
-1
-2
Of course how this affects different parts of the UK
-3
will vary.
Agents
-4
BCC New work by researchers at the University of
-5
CBI Strathclyde – as part of the Economics Statistics
-6
Centre of Excellence (ESCOE) – shows that the
economic gap between the south and north of
Source: Bank of England England has widened since the referendum. Chart
20.
After adjusting for inflation, London’s economy
is roughly 5% bigger than it was in June 2016
compared to growth of only 1.3% in the North East.
Chart 19: CFO Business Uncertainty since 2013 Chart 20: Nowcasts of UK regional growth, year to Q3 2018
70% 2.0%
1.8%
% of businesses rating uncertainty very high or high
60% 1.6%
1.4%
Real GVA growth (%)
50% 1.2%
1.0%
40% 0.8%
0.6%
30% 0.4%
0.2%
20%
0.0%
10%
0%
2013 2014 2015 2016 2017 2018
Source: Deloitte Source: ESCoE
Economic Commentary, December 2018 10Chart 21: GDP per capita in Scotland and the UK, Q1 1999 = 100 The Scottish economy
135
130
Scotland After a sustained period of weak growth, the Scottish
UK economy has been showing signs of strengthening.
125
120 Growth has picked up and employment remains
at relatively high levels. This has been a positive
Index (Q1 1999 = 100)
115
turnaround on twelve months ago.
110
Outturn Forecast
105 Growth over the year to June 2018 was the fastest
100
since late 2014/ early 2015, with the Scottish
95
economy outpacing the UK for the last two quarters.
90 That being said, annual growth of 1.7% (quarter-to
quarter) and 1.4% (4Q-on-4Q), still lags Scotland’s
Source: Scottish Government, SFC and OBR long-term historical growth rates.
At the same time, much of the pick-up in recent
times arguably reflects a degree of ‘catch-up’ after a
challenging period for the Scottish economy.
Chart 22: Sector contributions to annual GDP growth, %, Q2
2018 on Q2 2017 As Chart 21 highlights, since late 2014 the Scottish
1.8% 0.30% 0.06% 1.66% economy has been lagging behind the rest of the UK.
1.6%
Contribution to GDP growth (%)
1.4% 0.36%
0.21%
The last six months have at least helped to stop this
1.2%
1.0% trend.
0.12%
0.8% 0.23%
0.6%
0.4%
0.40% Overall, the upturn has been relatively broad-based.
0.2%
0.00%
0.0%
-0.02%
Over Q2, there was growth of 0.3% in production
-0.2%
activities, 1.9% in construction and 0.5% in
Electricity & gas supply
Other production
Government and other
Manufacturing
Business services
Distribution, hotels
Construction
Annual GDP growth (Q2 on Q2)
Agriculture, forestry
and communication
Transport, storage
and catering
and finance
and fishing
services.
With services making up over 75% of activity – it is
no surprise that Scotland’s overall rate of growth has
been shaped by services. Chart 22.
Production Services
Source: Scottish Government & FAI analysis The pick-up in Scottish exports continues, with
international exports increasing by almost 10% over
the last year.
With imports growing only 3% in value, this has
Chart 23: Contribution of expenditure components to nominal contributed significantly to nominal GDP growth over
GDP, Q1 2017 - Q2 2018
the last year. Chart 23.
4.5%
4.0% This currently means that, in the latest quarter,
Contributions to Nominal GDP growth
3.5%
Scotland has a positive trade balance with the rest
3.0%
2.5%
of the world, off-setting a large deficit with the rest
2.0% of the UK.
1.5%
1.0% In our report, Scotland 2050, we discuss Scotland’s
0.5% wider long-term export challenge and our gap in
0.0%
performance with the best performing countries.
-0.5%
-1.0%
Q1 Q2 Q3 Q4 Q1 Q2
We highlight the importance in taking advantage of
2017 2018 the significant global opportunities that are open to
Households Government Investment (GCF) Net Exports Nominal GDP the Scottish firms.
Source: Scottish Government & FAI analysis
11 Fraser of Allander InstituteChart 24: Scottish and UK economic performance since the The Scottish economy ten years after the
financial crisis
120
financial crisis
115
It is 10 years since Scotland – like many other parts
Level of GDP & GDP per head (2006 Q1 = 100)
of the world – slipped into recession as the global
110
financial system ground to a halt.
105
A decade later, how have we fared?
100
The financial crisis wiped around 4% of output from
95
the Scottish economy. UK output fell by over 6%.
90 Chart 24. Interestingly however, the scale of the
Scottish GDP Scottish GDP per head UK GDP UK GDP per head
85
downturn is now believed to have been much less
– around 50% smaller – than first measured at the
80
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 time at the height of the crisis. Chart 25.
Source: Scottish Government
Instead, what has been particularly challenging for
Scotland has been the weak recovery. It took around
five years for output to return to its pre-crisis level in
Chart 25: Scottish recession during the financial crisis - the
Scotland.
impact of data revisions (date estimates were published)
Chart 24 also shows that whilst the UK economy
108
suffered a deeper recession than Scotland (driven by
106 a sharper fall in services), it performed better in the
104
recovery period.
Indexed, Q1 2006 = 100
102 Today, GDP per head in Scotland is 1.7 per cent
100
greater than it was 10 years ago. To put that in
Sep_18
context, average annual growth in the preceding 10
98
Jul_17 years was 1.9% per annum.
Apr_16
96
Apr_14
Apr_12
The impact of the crisis varied by sector.
94
92
Unsurprisingly, construction bore the brunt of the
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
downturn – contracting by over 20%. According
2006 2007 2008 2009 2010 2011
Source: Scottish Government
to the newly revised data from the Scottish
Government, the sector in Scotland around the same
level as it was 10 years ago. Chart 26.
Chart 27: Volume of residential property sales in Scotland per
year, Q2 2003 - Q2 2018
Chart 26: Scotland’s construction sector since financial crisis
45,000
110
40,000
105
Volume of residential property sales
Level of Scottish Construction series (2006 Q1 = 100)
35,000
100
30,000
95
25,000
90
20,000
85
15,000
80
Scottish Construction Series
10,000
75
5,000
70
0
65
60
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Scottish Government Source: National Records of Scotland
Economic Commentary, December 2018 12Scottish Economy Dashboard
% of Growth
Key issues/trends
Economy 2017 Q2 2018
Production 17% 2.0% 0.3%
Manufacturing 11% 1.6% 0.8% ■■ Confidence and growth has returned recently. In particular,
growth in computer products, food and drink, and textiles
■■ Exporters continue to benefit from weak pound. But fall in
oil price, and slow down in export markets is a challenge.
At risk from dislocation of UK-EU trade
Food and drink 3% -0.8% 3.8% ■■ Sector continues to grow strongly – and is now at its
highest ever level
■■ Growth potential is high, although boosting productivity in
sector will be key for sustainability
■■ Future post-Brexit challenges could include ‘just-in-time’
deliveries and access to migrant workers
Services 76% 1.0% 0.5%
Retail and 10% 1.6% 1.2% ■■ The most recent data suggests a modest upturn in retail
and wholesale combined after a challenging start to 2018
wholesale
■■ But retail data suggests tough trading conditions, with
many high-profile names on the high street struggling
■■ Rising wages could give some respite to a sector going
through significant structural change
Accommodation 3% 0.2% -0.4% ■■ Modest growth over the year, but some fall-back in the
& food services most recent quarter
■■ Like retail, many eating establishments are facing
challenges. Changes in how households consume
entertainment is impacting many business models
■■ Tourist facing elements of sector continue to do well
Financial & 6% -0.9% 2.5% ■■ Sector has seen strong growth recently after a tough 2017
insurance ■■ Unlike other sectors directly exposed to the financial crisis
– such as professional services and real estate – financial
services has taken much longer to get back on its feet and
remains below pre-crisis highs
■■ Uplift in public sector capital investment should help
support infrastructure, but wider measures of activity
Construction 6% 4.4% 1.9% – including commercial property and house-building –
remain relatively subdued
■■ Grew strongly in 2017 but performance in the last four
quarters has been relatively poor
■■ Sector is arguably most exposed to any hit to migration
Agriculture 1% 4.6% -1.4% post-Brexit
■■ Sector will need clarity on support, opportunities and
regulation post-Brexit to ensure growth can continue
13 Fraser of Allander InstituteChart 28: Services and financial services since the 2008 The housing market has also yet to fully recover to
financial crisis, 2000 = 100 pre-financial crisis levels of activity. Chart 27.
160
Overall, services fared better. Output only fell by 1.6
150
per cent. Unsurprisingly, financial services output
140
fell sharply (by around 12%). It is still over 7%
Level of GDP (2000 = 100)
130 smaller than its pre-crisis level. Chart 28.
120 Interestingly however, it has adjusted to a
110 more ‘normal’ size which perhaps reflects how
Total Services unsustainable the ‘good’ times were but also the
100
Financial & Insurance activities underlying resilience of the (non-banking) sector
90
since.
80
A key concern from past recessions was that
unemployment could rise significantly. However,
Source: Scottish Government
whilst unemployment did rise (peaking at 8.9% in
2010), it has since fallen back.
But earnings have lagged behind for much of the
Chart 29: Performance of average real wages across the G7 decade. Indeed, earnings growth in the UK has been
since the financial crisis, 2007 = 100 the weakest in the G7 since the financial crisis.
115
Chart 29.
According to the Scottish Fiscal Commission, real
110
household incomes per head are on track to remain
105 below their pre-financial crisis levels even by 2023.
Index 2007 = 100
100
Poverty levels in Scotland have, as a result,
remained stubbornly high. Chart 30. around
95 1 million people are estimated to be living in
households classified as in ‘relative poverty’ –
90
including 1 in 4 children.
Canada France Germany Italy Japan UK US
85
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
The key reason for weak earnings growth has
undoubtedly been the poor performance of
Source: ONS & OECD productivity.
Had the pre-2006 trend continued, productivity in
Scotland would be around 15% higher than it is
today. Chart 31.
Chart 30: Relative poverty in Scotland (before and after housing
costs) Chart 31: Scotland’s long-term productivity performance
25 1,250 130
Number of people in households in relative poverty
% of households with in relative poverty
20 1,000 120
Level of productivity (2006 Q1 = 100)
15 750 110
10 500 100
5 250 90
Scottish Productivity (Output per hour)
Pre-financial crisis trend productivity
0 0 80
2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Relative poverty (before housing costs) (LHS)
Relative poverty (after housing costs) (LHS) 70
Number of people in relative poverty (before housing costs) (RHS)
Number of people in relative poverty (after housing costs) (RHS)
Source: Scottish Government Source: Scottish Government & FAI analysis
Economic Commentary, December 2018 14Chart 32: Scottish employment & unemployment rate Scottish labour market
10 77
Scotland’s labour market continues to experience
9 76
a period of historically low unemployment and high
8 75
employment.
7 74
Unemployment rate (%)
Employment rate (%)
6 73 Scotland’s headline unemployment rate is now
5 72 3.8%, its lowest recorded rate, with an employment
4 71
rate of 75%. Chart 32.
3 70
Overall, Scotland’s unemployment rate is one of the
2 69 lowest in the UK. Chart 33. However, unlike in the
Unemployment rate 16+ (LHS)
1 68 rest of the UK, inactivity has risen in Scotland over
Employment rate 16-64 (RHS)
0 67 the last year – up 0.4% points compared to a fall of
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
0.4% points in the UK.
Source: ONS, LFS
This might not all be bad news however, as the
largest increase has been amongst those aged
16–24, with some of this likely to reflect increased
student numbers.
Chart 33: Unemployment rate by different part of the UK In contrast to the past couple of years, the
6
balance of employment in Scotland between self-
5 employment and employee jobs appears to be
4
shifting back towards employees.
3 This suggests that the substantial rises in self-
%
2
employment witnessed since the Great Recession
may have eased somewhat. Chart 34.
1
At the same time, the number of people in part-time
0
work who are seeking – but cannot find – full-time
work continues to fall. Chart 35.
The ageing of Scotland’s labour force continues
apace.
Source: ONS, LFS
Chart 35: Percentage of part-time workers who cannot find full-
Chart 34: Scottish employment & self-employment time work, Jan-Dec 2004 up to Jul 2017 - Jun 2018
2,700 600 20
Total Employment (LHS)
Employees (LHS) 18
2,600
Self Employed (RHS) 500
16
Self-employed (thousands)
Employees (thousands)
Percentage of part-time workers
2,500
14
400
2,400 12
300 10
2,300
8
200
2,200 6
4
2,100 100
2
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: ONS, LFS Source: ONS, LFS
15 Fraser of Allander InstituteChart 36: Employment levels by age in Scotland since 2008-09 Employment amongst those aged 65+ continues
200 to rise. In contrast, there are fewer young people
16-24
25 - 34
employed now than 10 years ago.
180
35 - 49
Some of this reflects fewer young people in the
50 - 64
Jan 2008-Dec 2008 = 100
160
65+
general population, but it also reflects a lower youth
employment rate. Chart 36.
140
Whilst the headline measures of labour market
120 performance might appear robust, challenges
remain. In particular, real earnings growth (i.e. after
100
adjusting for inflation) in Scotland has been – at
80
best – barely positive over the last few years. Chart
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 38.
Source: ONS, LFS Much has been written about productivity since
the financial crisis. Many hypothesis have been
formulated, yet little appears to be changing in the
headline data. Chart 39.
In Scotland, while there has been some
Chart 37: Youth (16-24) employment and unemployment in
Scotland since 2008-09 improvement in ‘catching up’ with the UK over the
64 23
last decade, this reflects more the failure of UK
62
21
productivity than any particularly turnaround in
19 Scotland.
60
17
The last few quarters have produced better rates of
Unemployment rate
Employment rate
58 15 productivity growth, but overall, productivity has
56 13 barely moved since 2010/11.
54
11
A recent report from Deloitte UK on productivity
9 in UK’s Nations and Regions concludes that
52
7
Scotland needs more businesses of scale that
16-24 employment rate LHS 16-24 Unemployment rate RHS
are competitively positioned across international
50 5
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 markets as well as support in the development
Source: ONS, APS of leadership skills and confidence to enter and
succeed in export.
Chart 38: Median real earnings in Scotland and UK CPI inflation Chart 39: Scottish GVA per hour
5 105 4%
Labour productivity (Q1 2016 = 100) Output per hour
4 104
3%
3 103
2%
Growth rate (%) Output per hour
2 102
% change on year earlier
1%
101
1
100 0%
0
99
-1 -1%
98
-2 -2%
97
-3 Growth rate of productivity (RHS)
Inflation -3%
96
-4 Labour productivity (LHS)
Real Earnings 95 -4%
-5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2016 2017 2018
Source: ONS, ASHE Source: ONS, Scottish Government
Economic Commentary, December 2018 16Chart 40: Scottish hours worked, GDP and labour productivity The pre-financial crisis trend of sustained
3% productivity growth is no longer a given – temporary
Weekly hours (inverted) GDP Labour productivity
periods of growth have been eroded by stronger
2%
growth in the number of hours worked. Chart 40.
1%
New research by Edinburgh University academics
Robert Zymek and Mark Mitchell offers new insights
% Change
0%
on Scotland’s recent productivity performance. Chart
-1% 41.
-2%
Using novel methods, they show that the
productivity gap with the OECD’s top performers can
-3%
Q1 Q2 Q3 Q4 Q1 Q2
be attributed to a low capital stock per worker, and
2017 2018 low “Total Factor Productivity”. Chart 42.
Source: ONS, APS The former refers to the level of investment in
machinery, equipment and infrastructure. The latter
Chart 41: Productivity across countries, Denmark = 100,
to the efficiency with which an economy combines
purchasing power adjusted GDP per hour, 2014
its productive resources to grow its economy.
150
Whilst Scotland benefits from relatively high
125
workforce skills and relatively terms of trade, this
Productivity (Denmark = 100)
100 is insufficient to offset this weaker performance
elsewhere.
75
This suggests that solutions for Scotland should
50 focus upon boosting investment – both public
and private – and focussing upon the quality of
25
management within firms, the need to tackle the
0 prevalence of small and less efficient firms and
demographic factors (such as population age) which
may be possible culprits for Scotland’s low TFP.
Source: Mitchell and Zymek (2018)
Chart 42: Scotland’s relative productivity performance, by key driver, Denmark = 100, 2014
Workforce Skill Capital Stock
150
150
100
100
50 50
0 0
Terms of Trade Total Factor Productivity
150 150
100 100
50 50
0 0
Source: Mitchell and Zymek (2018)
17 Fraser of Allander InstituteChart 43: FAI/RBS Business Activity Index, 2008 - Expected Q4 Latest Scottish indicators
2018
40 Business Sentiment indicators for Scotland continue
to show a generally positive picture.
30
20
Expected
Our FAI/RBS Business Activity Index shows the
Net balance of responses (%)
expectations for Q4 to be fairly buoyant, following
10
a strong Q3 – Chart 43. The main areas of concern
0 remain around investment, as decisions are delayed
-10
due to wider economic uncertainty. Table 4.
-20 The RBS regional PMI shows that the sentiment in
Scotland is in positive territory, on a par with the UK
-30
as a whole. Chart 44.
-40
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
The retail sector in Scotland has had a difficult
Source: FAI - RBS Business Monitor period over the last year or so, with quarterly growth
lagging the UK. Chart 45.
Indeed, the volume of retail activity over the last
year in Scotland has grown by 1.3%, compared to
Table 4: FAI/RBS Business Monitor key indicators, Q3 2018
3.4% in the UK.
Q3 Quarterly 12 month 3 year
2018 change change average It is large retailers (those with 250+ employees) in
Business volume (net balance) Scotland that seem to be suffering the most. Volume
New business +16% +7 +4 +17 of business in retail has remained flat over the
Repeat business +10% +10 +9 +2 last year for these larger retailers, and has in fact
Business concerns (%) contracted in the latest quarter.
Weakening demand - important 77% -5 -1 -4
Exchange rates - important 53% +1 -3 +3
This compares with healthy growth for smaller
retailers that is more similar to the overall UK
Investment (net balance)
picture.
Capital investment -11% -5 -3 -8
Leasing -24% 0 0 -20
Source: FAI-RBS Business Monitor
Chart 45: Quarterly retail sales growth in Scotland and GB since
Chart 44: RBS UK regional PMI, Jan 2016 - Oct 2018 2016
2.5%
65 Scotland GB
2.0%
Purchasing Managers Index (>50 = expansion)
60 1.5%
1.0%
Growth (%)
55
0.5%
0.0%
50
-0.5%
45 -1.0%
Scotland London
Other UK regions and S. East nations S. West
devolved
East Wales W. Midlands E. Midlands -1.5%
UK
Yorkshire N. East N. West N. Ireland Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
40
2016 2017 2018 2016 2017 2018
Source: RBS Source: Scottish Government
Economic Commentary, December 2018 18Chart 46: Scottish Government Consumer Sentiment Index In contrast to business sentiment, the confidence
current conditions, Q2 2013 - Q3 2018 of consumers is much more subdued. The outlook
40
for the Scottish Economy, household spending and
Scottish Economy
finances are all in negative territory. Chart 46.
Net balance of responses (>0 = positive)
30
Household Finances
Looking in detail at consumer expectations for the
20
Household Spending
Scottish economy, the trend since 2015 has been
10 that fewer people think the economy is getting
better, and more people think the economy is
0
getting worse overall. Chart 47.
-10 This would chime with the official data on the
Scottish economy, insofar as the gap between
-20
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Scottish and UK GDP per head has widened and then
2013 2014 2015 2016 2017 2018
persisted over recent years.
Source: Scottish Government
The UK Consumer Confidence Barometer is
conducted by GfK on behalf of the EU, with similar
surveys being conducted in each European country.
Chart 47: Scottish Government Consumer Sentiment Index The current survey was carried out in early November
expectations of the Scottish economy, Q2 2013 - Q3 2018 2018. This collects views on personal finances,
50
Getting better Getting worse
general economic conditions, views on major
40 purchases and how good a time it is to save.
30
The most recent figure for Scotland is both low in
% of household responses
20
historical terms and compared to the UK. Indeed,
Better
10
0 this is the lowest value in over 4 years. Chart 48.
10
Worse
The outlook for the labour market remains positive.
20
30 Most indicators - such as the RBS Jobs Barometer -
40 all point to the labour market in Scotland operating
50 at near capacity. Chart 49.
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2013 2014 2015 2016 2017 2018
Source: Scottish Government
Chart 48: GfK Scottish Consumer Confidence Index, Jan 1997 - Chart 49: RBS Scottish Jobs Barometer index: continued high
Nov 2018 demand for jobs
20 70
68
10
66
0 64
62
Net balance
-10
60
-20
58
Scotland
56
-30
Scotland UK 54 UK
-40
52 12 month moving
average
-50 50
2013 2014 2015 2016 2017 2018
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: GfK Source: RBS and IHS Markit
19 Fraser of Allander InstituteTable 5: Latest GDP growth forecasts and outturn Scottish Fiscal Commission’s forecasts
2017/18 2018/19 2019/20 2020/21
Alongside the Scottish Government’s Draft Budget,
SFC (Dec 2017) 0.7% 0.8% 0.9% 0.6% the Scottish Fiscal Commission (SFC) will publish
SFC (May 2018) 0.7% 0.8% 0.8% 0.9% their revised forecasts for the Scottish economy.
SG (Sep 2018) 1.3% - - -
We discuss the wider budget context in the Policy
2017 2018 2019 2020
section of the Commentary.
FAI (Sept 2017) 1.2% 1.4% 1.7% -
FAI (Sept 2018) - 1.3% 1.4% 1.4% The SFC forecast a number of variables around their
Source: Scottish Fiscal Commission, Scottish Government & FAI analysis now twice yearly reports. This is all underpinned
by an ‘overall’ view of how they think the Scottish
economy is faring and the outlook.
The SFC have been cautious, forecasting growth of
Chart 50: Employment rate (16+) in Scotland and the UK less than 1% until 2022. Table 5.
61%
So what is worth watching out for?
60%
The first thing that the SFC will have to do is reflect
upon how their forecasts compare with the most
16+ employment rate
59%
recent data on Scottish GDP (in particular, the major
revisions to the Scottish construction series).
58%
It is highly likely that the SFC will revise up their
57%
growth forecasts. However, we see little evidence
Scotland
that they will take a much more positive outlook
56%
than in their first two sets of forecasts.
UK
55%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
The second key element that they will have to
Source: ONS APS consider is how ‘tax rich’ this growth is likely to be.
For income tax, the most significant devolved
revenue by far, the two most important elements are
employment and earnings.
Chart 51: Annual growth in earnings (outturn) and SFC & OBR Mirroring the trend in economic performance,
forecasts
Scotland’s employment rate fell in 2016. Since then,
7% Outturn - Scotland employment in Scotland is now growing at the same
Outturn - UK
6%
SFC Dec 2017 rate as in the UK. Chart 50.
SFC May 2018
Annual growth in average earnings
5%
OBR Nov 2017
OBR Oct 2018
What about earnings?
4%
3% Chart 51 compares outturn data on average annual
2% earnings in Scotland and the UK, alongside two
1%
recent forecasts of earnings growth from the SFC and
OBR.
0%
-1% The latest data has confirmed somewhat slower
-2% growth in Scotland, consistent with the SFC’s
assessment in May. However, the good news is that
the gap between Scotland and the UK may not be
Source: ASHE, SFC & OBR
as large as perhaps thought. However, it seems
likely that the SFC will continue to forecast weaker
earnings growth in Scotland relative to the UK as a
whole.
Economic Commentary, December 2018 20Our forecasts
Table 6: Latest growth forecasts for the UK economy
2018 2019 2020
Bank of England 1.5% 1.8% 1.7%
OBR 1.3% 1.6% 1.4% Economic forecasting in the current climate is
NIESR 1.4% 1.9% 1.6% fraught with difficulty.
European Commission 1.3% 1.2% -
Even in ‘normal’ times, forecasting is not an exact
IMF 1.4% 1.5% 1.5%
science. An economy – particularly a small open one
Oxford Economics 1.3% 1.7% 2.0% like Scotland – is constantly subject to events out
ITEM Club 1.3% 1.5% 1.7% with its control. This is why we are clear about the
CBI 1.4% 1.3% - sensitivities of our forecasts and encourage readers
Source: HM Treasury, Bank of England, OBR to focus on the range of estimates.
The unpredictability of short-term outcomes, also
highlights why it is important – particularly from a
Table 7: Bank of England projections - what could they mean for
Scotland? (compared to the financial crisis) policy perspective – to focus upon the long-term
drivers of growth and prosperity.
GDP Unemployment House
prices But the debate in Scotland on such questions
2008-09 Financial -4% +131,000 -16% remains weak. We have through the year pointed to
Crisis
the weaknesses in strategy and economic thinking
Disorderly -8% +100,000 -30% within policymaking. We see little evidence of things
Disruptive -3% +52,000 -14% having changed for the better.
Economic -0.75% to +/- 2,000 N/A
partnership + 1.75% In terms of immediate prospects, Brexit remains the
key risk factor.
Source: Bank of England, Fraser of Allander Institute
Firstly, no-one can predict with confidence what
might happen next – particularly if Parliament votes
Table 8: FAI Nowcasts for Scotland’s GDP in Q3 and Q4 2018 against the proposed withdrawal agreement.
Q3 Q4
Secondly, there is simply no precedent for a
Quarterly Growth 0.35% 0.39% ‘no deal’ outcome to use as a benchmark for
Annualised Growth 1.42% 1.57% forecasting. In Box 1 we discuss the channels
Source: Fraser of Allander Institute through which the economy could be impacted.
So without any hard evidence about what might
Chart 52: FAI forecast Scottish economic growth range
happen next politically, we have based our analysis
upon a smooth transition deal. This is the approach
4%
Forecast
taken by most other forecasters. Table 6.
3%
The Bank of England has provided some thoughts.
2%
In November, they set out a series of scenarios
covering how the UK economy may evolve in the
Annual GVA Growth
1% event of a no deal. Table 7.
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
In this ‘worst case’ scenario – one of a disorderly
Brexit – the Bank believe that the UK economy could
-1%
shrink by 8%.
-2% To put this in context, the Scottish economy
contracted by just under 4% during the financial
-3%
Source: Fraser of Allander Institute crisis.
* Actual data to Q2 2018. Central forecast with forecast Table 8 shows our latest nowcasts.
uncertainty for 2018 – 2020. Uncertainty bands sourced from
accuracy of past forecasts at different forecast horizons.
21 Fraser of Allander InstituteTable 9: FAI forecast Scottish GDP growth (%) 2018 to 2021 The results are consistent with our expectations for
2018 2019 2020 2021 growth in 2018 first made in 2017. On balance, we
believe that – setting aside any risks from the Brexit
GDP 1.3% 1.4% 1.5% 1.4%
negotiations going awry – Scotland should be on
Production 1.5% 1.6% 1.7% 1.6%
track to grow at a broadly similar rate to last year (if
Construction 1.0% 1.1% 1.1% 1.1% not slightly faster). Table 9.
Services 1.2% 1.4% 1.4% 1.4%
Source: Fraser of Allander Institute Turning to our forecasts for the next three years,
as in the past, we report a central forecast but also
uncertainty bands that set out a likely range within
which we predict Scottish economic growth will lie.
It is important to note that such bands are based
upon historical variations in our ‘normal’ forecasting
performance. The potential for a ‘no deal’ Brexit
Table 10: FAI Labour Market forecasts to 2021 outcome is clearly not a ‘normal’ event and would
2018 2019 2020 2021 significantly lower our outlook for growth. We do
Employee jobs 2,495,250 2,521,800 2,550,400 2,577,700
think that the worst case scenario put forward by the
Bank is highly unlikely, though accept growth will
slow sharply.
% employee job
1.0% 1.1% 1.1% 1.1%
growth over year
A technical recession – i.e. two or more consecutive
ILO 98,000 103,500 104,400 112,500
unemployment
quarters of falling output – whilst by no means a
certainty, cannot be ruled out.
Rate (%)1 3.7% 3.9% 3.9% 4.1%
Source: Fraser of Allander Institute With nominal earnings growth expected to pick-up,
Absolute numbers are rounded to the nearest 50. and provided that this outpaces inflation, household
1
Rate calculated as total ILO unemployment divided by total of spending should see some modest gains.
economically active population aged 16 and over.
Investment activity is likely to remain under pressure
as Brexit-uncertainty continues to cast a shadow
over growth ambition. But it could also be the
element that bounces back most strongly in the
event of a positive outcome (from the perspective of
maintaining close ties to the EU).
Chart 53: FAI GDP forecasts by sector, 2018 – 2021 Net exports and tourism are on track to continue to
1.6 benefit from the low value of Sterling. However, the
1.4
softening in global growth might mean that 2019 is
not as healthy as 2018. As in recent years, services
1.2
should make the greatest contribution to growth.
There is a renewed risk in manufacturing however,
% contribution to GDP growth
1.0
0.8 with the downturn in the price of oil likely to test
0.6
the resilience of the oil and gas supply chain. Most
indications are that the sector is better prepared
than four years ago. Chart 53.
0.4
0.2
With major new public investment in the pipeline,
0.0
2018
Households Government
2019
Investment Trade (RUK)
2020
Trade (ROW)
2021
GDP growth, %
the construction sector should continue to see a
more sustained outlook.
Source: Fraser of Allander Institute
We expect unemployment to rise slightly toward
a level consistent with more medium-term trends.
Table 10.
Economic Commentary, December 2018 22Box 1. ‘No deal’ Clearly the greatest risk to our forecast is the possibility of ‘no deal’. Our own estimates suggest that – over the long-run – such an outcome would act as a significant drag on Scotland’s long-term growth potential. These estimates were obtained from what is known as a general equilibrium model of the Scottish economy. This however tells us little about the short-term impact of ‘no deal’. The challenge with forecasting what a ‘no deal’ might mean is the lack of any precedent to fall back on. So whilst we can be confident that a breakdown of the UK’s economic relationship with the EU will have significant economic implications, it is difficult to attach an exact number. The OBR and most independent forecasters have stuck to assuming that the UK and the EU will secure some form of deal, with a transition period. We follow that approach. The Bank of England in contrast, has set out a series of scenarios for what ‘might’ happen, with the aim of stress-testing the banking system. Up to March 2019, if a ‘no deal’ increases in probability, there are likely to be two forces at work. Firstly, there is a series of factors that may slow the economy even further. Sterling is likely to fall, pushing up inflation and reducing real wages. Financial markets are likely to be volatile. Some have suggested that the UK’s Credit Rating may be downgraded. All of this could lead to a further fall in business and consumer confidence, reducing investment and spending. Secondly, however, there are some forces that could boost growth. In particular, businesses and government may start to prepare – e.g. stockpiling and contingency planning – and this will help boost spending in the short-term. One thing that can be guaranteed is that economic activity is likely to be choppy. Post-March 2019, the outlook in the case of a ‘no deal’ outcome is likely to be more negative. Firstly, any boost from stockpiling and contingency will gradually be eroded: items stockpiled prior to ‘no deal’ cannot be used more than once. Secondly, uncertainty over how long a ‘no deal’ outcome could last might further dampen investment and spending. Thirdly, and of course most significantly, the actual barriers that a ‘no deal’ outcome would create – in terms of tariffs, customs controls and regulations – would come into immediate effect. The disruption to export markets and supply chains – for some – could be significant. Whilst it is important to remember that most UK businesses are one-step removed from international markets, the knock-on effects from weaker growth through supply chains is likely to be the key avenue through which growth slows. Analysis by the Fraser of Allander Institute showed that around 130,000 jobs are supported by EU export demand in Scotland. Much will depend upon how the government and Bank of England respond. It is also possible that the UK and EU authorities (at least in the short run) would try to mitigate some of the most disruptive consequences of a disorderly Brexit. 23 Fraser of Allander Institute
You can also read
