AFTER a week with attention focused on Scotland’s Budget, it is easy to forget that our economic fortunes are still largely determined by what happens beyond our borders, and indeed outside of the UK.
A tumbling oil price, a persistently strong sterling exchange rate and continued sluggish growth in the Eurozone have been major influences on economic performance in recent quarters. And that is likely to remain the case in 2016.
In his latest State of the Economy report, the Scottish Government’s chief economist, Gary Gillespie, sets out how a more challenging external environment, including a more muted global economy and the effect of a sustained fall in oil prices has led to a significant slowdown in growth. This is evident in the most recent quarterly and annualised GDP data, with growth of 0.1 per cent and 1.9 per cent, respectively. His forecast for overall growth in Scotland remains at just below 2 per cent for 2015, barely keeping pace with the long-term growth rate.
Headwinds, indeed. But if our fate is so determined by these global headwinds, why are these figures notably below those for the UK as a whole?
Figures due out this week for UK GDP growth in the third quarter are expected to confirm expansion at 0.5 per cent quarter-on-quarter and 2.3 per cent year-on-year. Global Insight economist Howard Archer expects GDP growth to improve to 0.6 per cent quarter-on-quarter in the final three months of the year, resulting in overall UK GDP growth of 2.4 per cent in 2015. And for the year ahead he is looking for growth to be sustained at 2.4 per cent.
Scotland’s leading independent forecasters – Brian Ashcroft at the Fraser of Allander Institute, Ernst & Young and Inverness-based Mackay Consultants – are reckoning on Scottish economic growth of between 2.1 per and 2.2 per cent next year – all three of these predictions made before the latest downward lurch in the oil price to below $40 a barrel and a fresh round of investment cutbacks and lay-offs.
And it is the brutal retrenchment in the North Sea sector – job losses of 5,500 directly employed – 15 per cent of the total workforce – since late last year, with estimates of the wider impact putting the jobs loss as high as 65,000 that largely explains the slower performance of Scotland’s economy.
Add to this the estimate of investment cutbacks in the North Sea totalling some £12 billion and it is highly unlikely we will see much of a recovery even if the oil price swings back towards $50 next year.
However, our “headwinds” are not confined to the North Sea sector. Last week brought a warning from the Bank of Scotland that, for the second time in three months, business activity in Scotland’s private sector contracted last month, with a significant fall in incoming new orders.
The bank’s seasonally adjusted Purchasing Managers Index – a single-figure measure of the month-on-month change in combined manufacturing and services output – has declined to 49.8, down from 50.9 in October. The rate of contraction in the manufacturing sector was the sharpest in just over three years.
Incoming new orders received by private sector companies in Scotland declined for the second time in three months during November. Scottish goods producers registered a sharp contraction in both domestic and foreign demand.
Over the past two years, Scotland’s economy has been helped in great measure by a powerful performance from construction. Here major public sector infrastructure investment spending has played an important role. A number of major projects have helped the economy to put in a resilient performance in a year that has seen a slowing in the pace of the global economy and persistent concerns over the health and strength of China’s economy.
However, there are doubts on whether this construction boom can be maintained over the coming year and beyond. Adding to these doubts will be the latest quarterly survey of construction industry employers due this week. This is expected to show confidence in the Scottish construction sector has fallen again during the final quarter of 2015.
All this leaves household spending to do some heavy lifting – yet again. For all the talk about a rebalancing of the economy, we are still dependent on the household sector to sustain overall growth. As Gary Gillespie observes, households have benefitted from lower prices and an improving financial outlook.
This has been helped by continuing growth in employment. Figures last week showed more people in Scotland in employment – figures for the August-October quarter show employment at 2,615,000, an increase of 10,000 over the year and 71,000 higher compared to the same period in 2008. The unemployment level fell by 8,000 over the quarter to reach 156,000. This is in marked contrast to the gloomy forebodings of Finance Secretary John Swinney and others that spending cutbacks and “Westminster austerity” would stymie an employment and broader recovery.
But in household spending, too, there are concerns about the strength of the recovery pace. Figures for the UK overall point to a robust performance: November saw a 1.7 per cent month-on-month surge in retail sales volumes, fuelling expectations that robust consumer spending could result in UK GDP growth reaching 0.7 per cent quarter-on-quarter.
But the performance of Scotland’s retail sector looks less sure-footed. Figures last week showed the value of Scottish retail sales last month fell 2.3 per cent.
The latest retail value figures are set against a 1.4 per cent overall decline recorded in November of last year. The SRC/Springboard Footfall Monitor report showed retail footfall in Scotland dropped 4.2 per cent in November, the largest margin fall in three years. For the UK overall, footfall was down 2.1 per cent. Given all this, it is hard to see where a following breeze will come from to help offset those “headwinds”. «