Bill Jamieson: Let’s hear it for Scots brickies

FEATS of braveheart brickies spark fears of Potemkin building boom, writes Bill Jamieson

The construction sector rose by 6.1 per cent. Picture: TSPL

So it was disconcerting to read the SCC’s latest Quarterly Economic analysis pointing to a slowdown in the first quarter of the year. The survey, produced by its Economic Development Intelligence Unit in collaboration with the Fraser of Allander Institute of the University of Strathclyde, is based on responses from 643 firms across the Scottish economy.

The results of the 2014 editions of the SCC’s Quarterly Indicator correctly predicted an easing of growth between the second and third quarters. “These latest results,” it says, “would suggest further easing of GDP growth in Q1 2015 from the yet to be released Q4 2014 GDP figure”.

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Over the first three months of the year it finds there was “significant easing” in the growth levels of most performance indicators, for each of the five sectors covered by its survey.

Manufacturing firms experienced a deceleration in order growth over the final three months of last year, a trend, says the SCC, that has continued into 2015.

Results from the financial and business services sector show that while sales revenue and profits rose over the quarter, “where comparisons are available, all growth levels were lower compared with Q1 2014.”

SCC chief executive Liz Cameron says: “Other economies have moved on and we need to catch up and overtake them. Our first economic indicator covering 2015 depicts an economy that has returned to pre-recession levels and is now on a path of slower growth. That wasn’t good enough then and it isn’t good enough now. Scotland needs to up our game and our targets.”

Arguably the most striking feature of the SCC survey is the construction sector where it finds a decline in new business, sales revenue and profitability compared with the previous quarter. “Overall contracts are reported as down with a noticeable drop in public sector contracts. When compared with Q1 of last year, net percentage balances are lower for all contract categories.”

This will almost certainly cause consternation within the Scottish Government. For its latest assessment of our economic performance, released last week, contained truly startling numbers for construction.

Its figures for the fourth quarter of last year suggest we have been in the throes of a major construction boom, while the services sector – by far the largest part of the economy – was flat. That in itself is a highly concerning feature and suggests that, even before election uncertainties took hold, service sector confidence and investment may have plateaued. The official figures show the economy to be growing slower than the UK overall. In particular Scotland’s services sector – the dominant part of the economy – is lagging well behind.

And, most concerning of all, most of the growth recorded in recent quarters is due to a construction boom, with growth rates a multiple of those elsewhere in the UK.

A genuine boom – or a statistical glitch? According to the figures, Scottish GDP rose by 0.6 per cent in the fourth quarter. Services output remained at the same level, while the production sector grew by one per cent – and construction by a whopping 6.1 per cent.

Indeed, no less than two-thirds of the increase in Scotland’s GDP is attributed to this extraordinary construction sector boost. Comparing the whole of 2014 with 2013, construction is said to have risen by a truly startling 13 per cent, production up by only one per cent and the service sector by 2.3 per cent.

Could it be a secret new town conurbation has been constructed? Might the entire government sector be building “iceberg homes”? It seems our builders have been toiling at a rate that would put to shame the five-year plans of the old Soviet era. Will Scotland’s Stakhanovite brickies please stand up?

The authoritative public finance think tank Fiscal Affairs Scotland highlighted the strange anomaly of the construction figures.

John McLaren, of Fiscal Affairs Scotland (FAS), says the improvement recorded in the construction sector over the past year has been “remarkable but little commented upon”. And he added that “the relatively sluggish performance of the services sector is a concern”.

The quarterly output figures were the first to adapt to a new method of measuring growth, which takes account of a wider range of factors, including research and development, and illegal drugs and prostitution. But it is hard to see how these could account for the runaway construction boom. Since the peak of economic output in 2008, the Scottish economy fell and rose again, to be 2.3 per cent higher, while the UK economy, which hit a deeper trough but has since grown back more strongly, is 5.1 per cent bigger.

The FAS analysis also highlighted the reason for UK GDP growing faster overall was the services sector, representing three-quarters of the economy. It grew twice as fast at the UK level (3.4 per cent) than in Scotland (1.7 per cent).

FAS also points out that average annual growth since 1998 has been 1.6 per cent in Scotland, and 2.2 per cent in the UK as a whole.

The hotel and food services sector continues, under the government’s new methodology, to do nothing for the Scottish economy: output is said to be down two per cent on the decade 2004 to 2014, though it is one of the fastest growing UK sectors – up 16 per cent over the same period. VisitScotland’s Mike Cantlay would surely take issue with this. Can the Scottish Government data really be correct?

Downbeat though the latest SCC analysis may be, activity across almost all sectors remains above pre-recession levels and long-term averages. Investment activity, both capital and training investment, it finds, was surprisingly positive across all sectors throughout the quarter. Strong investment figures were generally matched by healthy levels of optimism, positive expectations of future sales revenue and profits, and for future investment expenditure.

However, this is a slowdown in the rate of growth before election uncertainties kick in. And the anomalies in the Scottish government data surely compel a second look. In the meantime, if its figures are anything like correct, let’s hear it for Scotland’s brickies. «