Is good news infectious? In Scotland we should keenly hope so. For the tail-end of last week brought a “triple whammy” of encouraging pointers for the UK economy overall.
In Scotland recent news has not been at all good, with the Scottish Government’s deeply disappointing 0.2 per cent growth estimate for the third quarter a real dampener on spirits. So businesses north of the border – and the Scottish Government too – will dearly wish to see this good “rUK” news spreading to all corners.
There’s been understandable concern over Brexit effects – seven months on from that vote and we’re still waiting for a ton load of wet cement to crash from the sky and crush the economy into recession.
But the concrete deluge hasn’t happened, and on the latest indications it looks as if we’ll be spared one for the foreseeable future. There is a hat-trick of encouraging news. And the combined effect is to suggest that the economy is firing on a range of cylinders – and that we are not totally dependent on the consumer sector as many have feared.
First, latest figures from the Office for National Statistics (ONS) show that the manufacturing sector UK-wide grew faster than expected at the end of last year. Output from the sector grew by 2.1 per cent in December and was up 1.2 per cent in the October-to-December quarter.
Industrial production overall rose 1.1 per cent month-on-month in December after rebounding 2 per cent in November. This was driven by that rebound in manufacturing – and this in turn by a strong performance by the pharmaceuticals sector, which rose 8.3 per cent in December and 9.8 per cent quarter-on-quarter in the final three months of 2016.
In fact, no less than nine of the 13 manufacturing sub-sectors saw quarter-on-quarter growth in the fourth quarter.
The one weak spot was oil and gas extraction which fell 1.1 per cent month-on-month. There was also a 2 per cent month-on-month dip in energy output, influenced by mild weather.
A second cause for cheer is that construction output grew 1.8 per cent month-on-month in December – the largest increase since April. New house building – for long the Achilles Heel for frustrated house buyers and the UK government alike – rose 2.9 per cent month-on-month in December and is up 1.4 per cent quarter-on-quarter in the fourth quarter of 2016.
And third, the UK’s total trade deficit narrowed to £3.3 billion in December. Total exports rose 2.4 per cent month-on-month in December while imports were up 1.7 per cent.
As a result the overall deficit narrowed sharply to £8.6 billion in the final quarter of 2016. In volume terms, UK exports of traded goods rose 3.1 per cent month-on-month in December and by 7.1 per cent quarter-on-quarter in the fourth quarter.
It now looks as if net trade made a modest positive contribution to GDP growth of 0.6 per cent quarter-on-quarter in the final three months of the year. And that in turn should nudge up our overall GDP performance if this resilience continues into the first quarter of 2017.
Meanwhile, survey evidence for January from both the CBI and the purchasing managers was again largely upbeat, showing healthy orders growth and decent output and production expectations. However, the purchasing managers indicated that export orders growth slowed in January (although this was not evident in the CBI survey) while both surveys reported a further surge in manufacturers’ costs and pricing due to the weakened pound as well as recent higher oil and commodity prices.
While Scotland continues to labour under the continuing effects of the oil downturn, there cannot but be some beneficial effects. As economist Tony Mackay notes, economic output here is a mixture of domestic demand and exports: the former accounts for some 75 per cent of the total and exports 25 per cent – and most of these (15 per cent) are to the rest of the UK. Domestic demand is therefore much more important than exports. And if manufacturing and construction business demand holds up that should feed through to all regions.
Now there are caveats to all of this. A big concern is another sharp year-on-year rise in imported goods prices resulting from higher oil and commodity prices as well as the weakened pound. Latest ONS data show that producer input prices jumped 1.8 per cent month-on-month and 15.8 per cent year-on-year in December.
This reinforces concern over consumer price inflation in due course. Global Insight economist Howard Archer predicts it will hit 3 per cent before the end of this year.
The purchasing managers’ surveys indicated that export orders growth slowed in January while manufacturers are reporting a surge in costs and pricing.
And Archer warns that other challenges are looming. “Demand for capital goods is likely to be constrained as business confidence is increasingly pressurised by slowing UK economic activity and by mounting uncertainties over the Brexit process. Significantly higher prices charged by manufacturers for capital goods will also likely constrain demand.”
It also looks highly probable, he adds, that “consumers will become markedly less able (due to diminishing purchasing power) and likely more reluctant to buy big ticket consumer durable items over the coming months.”
So the overall picture is one of guarded optimism. It’s hard to credit given the dominance of Brexit fears and apprehensions in media coverage and all the talk of hard and uncompromising negotiation stances by EU leaders. But this is to a large extent generated by concerns over forthcoming elections across Europe this year. All told, some 40 per cent of voters in continental Europe will have a chance to cast a vote this year.
The major elections are in the Netherlands on 15 March and the final round of the French presidential elections on 7 May. Both have the potential to deliver a major shock to the political establishment of Europe while the German parliamentary elections, due not later than 22 October, are also likely to show a swing to the Eurosceptic, anti-immigrant right.
We sail to these troubled waters with at least some power in the engine. But it may not be from Brexit that we have most to fear – but trauma at the heart of the EU itself.