Short-term growth goal met, now for wider challenge

The recent GDP figures confirmed that the UK barely kept going upwards in the second quarter. Now, as we face a worsened world situation, we must ask how have Scotland’s competitive advantages evolved? Where are they heading?

The Scottish Government Economic Strategy, published with cross-party support in 2007, set the bold short-term target of matching the UK’s economic growth rate by 2011. The update, now churning through St Andrew’s House, will be able to say that first goal has been met.

During the first phase of the great global contraction, the overall evolution of Scottish GDP has almost exactly matched that of the UK. Could it be that the boldness of Salmond and Swinney has made them lucky generals, or is it the ingenuity of Scottish entrepreneurs and managers?

Detailed statistics show the fortunes of individual sectors have been quite different between Scotland and the rest of Britain, however. The output from farming, fishing and forests has held up, while the UK is down 15 per cent since 2006.

The UK’s “production” industries started falling in the second quarter of 2008, and bottomed in the third quarter of 2009. Scotland’s peaked three quarters later, and started rising two quarters earlier. This was thanks to steeply rising electricity production, and a drastically different manufacturing experience.

Take Grangemouth. Oil refining has been on an uptrend for a decade, with good hopes of that being maintained under the new Chinese influence. In the 1990s, Scottish chemicals stayed anchored round Grangemouth with a newly-diverse company structure after ICI and BP. Meanwhile, the chemical industry around Merseyside, Teesside and Yorkshire shrank substantially.

In the Highlands, Scotland’s highly-specialised man-made fibre industry – SGL carbon fibres from Muir of Ord near Inverness – expanded while clothing fibre plants in England and Wales closed. These shifts mean that chemicals and man-made fibre output has risen 8 per cent in Scotland since late 2009, while UK output has fallen a further 8 per cent.

After the smelter shutdown of the 1980s and the Ravenscraig decimation of the 1990s, the remnants of Scotland metal industries have been expanding since 2004, with “only” a 12 per cent drop in the recession. The UK’s plummeted 22 per cent, started to recover, but is now beginning its second dip.

Engineering was the Scottish sector most disrupted by the last great recession in the 1980s, hammered by exchange rates but resuscitated as waves of oil fabrication and inward investment in computers passed over our economy.

Now well past their peak, both offshore oil and microelectronics have nevertheless bequeathed refocused engineering businesses and skills which are still exporting. The west of Scotland carries on, but many workshops of the newer engineers are around Aberdeen and the Forth. While British engineering output fell 20 per cent in the course of 2008, Scottish dropped only 15 per cent and is now back to its 2007 level.

Scotland’s food and drink output (whisky is still our most distinctive industry) has been on a rising trend since the millennium, while the UK’s slid downwards between 2007 and 2010.

On the services side, things have also been different. We all know why the statistics show financial services falling 25 per cent, against a UK figure of 11 per cent, and doing it much sooner. After a short recovery in late 2009, they are now well into their second dip. Conversely, Scottish retailing and wholesaling suffered only half of the UK’s first dip.

Public service output has not yet fallen anywhere – the main impact of the coalition cuts has so far been to destroy confidence, not to save money. Scottish statisticians measure public output with more precision than their UK counterparts – it has risen only 2 per cent in Scotland since 2006. The figure for the UK as a whole still tracks mainly costs, rather than benefits, and is up 6 per cent.

All of these add up to significant shifts in competitive advantage, many showing that Scotland was rebalancing itself before the Osborne Budgets. The question is will they, and extra powers for Holyrood, be enough to meet the long-term target of the government strategy? Will we match the growth rates of Scandinavia and other small countries, who are now faring relatively well in a dire global situation?

l Hervey Gibson is chairman of Cogent Strategies International and former head of economics at Scottish Enterprise