Bill Jamieson: Where we’re strong, where we’re weak

Drugs companies are running down their Brexit stockpiles. Picture: Getty/iStockphoto

When our growth rate over some particular quarter is shown to have exceeded the rest of the UK, Holyrood ministers claim this as evidence that their policies are working. When performance lags the rest of the UK, it is Westminster’s fault – naturally.

Such easy judgments and comparisons let us down on many levels. There are externalities that can have a larger impact on growth figures for Scotland – fluctuations in the oil price and the ups and downs of North Sea oil activity, for example.

Economic performance is also rarely uniform across all activities and sectors so that an aggregate number may not only be telling us little but might also be misleading. There are wide variations in growth between the manufacturing and retail sectors, for example, and that between construction and business services. The reasons for such varied performance compel attention.

Quarterly data can be variable. For example, our economic growth in the first three months of the year was the fastest for two years, but in the April-June quarter we fell back sharply. The biggest falls occurred in sectors which showed large increases in the previous quarter.

And then there are longer-term underlying factors, not always evident in latest quarterly data, that can be overlooked when a broader analysis can tell us more than a clutch of short-term indicators.

So where is the economy in Scotland doing well? And where are the weaknesses that need addressing?

These questions have snapped into focus with the latest official figures on Scotland’s economy. These showed a disappointing 0.3 per cent contraction in output between April and June. Construction saw a sharp reduction in activity, while our service sector barely grew. On an annual comparison with the rest of the UK, Gross Domestic Product (GDP) in Scotland was up by just 0.7 per cent, while that for the UK economy grew by 1.2 per cent over the same period.

Scotland’s Finance Secretary Derek Mackay lost no time in apportioning blame. “Given the repeated warnings from business organisations and the contraction across the UK in the same quarter,” he declared, “it is unsurprising but deeply frustrating that we are now seeing the Brexit impact on the Scottish economy.

“The responsibility for this contraction lies entirely with the UK government. Any form of Brexit will damage our economy and a no-deal Brexit would be disastrous for Scotland and could push the country into recession.”

Brexit uncertainty – three and a half years of it and with government and parliament still in constitutional gridlock – has been a killer for business expansion and investment. Plans have been put on ice and new projects postponed amid a constant downpour of warnings and bleak forebodings over chaos at ports, supply chain disruption, component shortages, lost business and the daily recitations of a no-deal crash-out and catastrophe.

Figures show that in the first three months of 2019 more than half of GDP growth came from two sectors – the manufacturing of spirits and wines, and pharmaceuticals – this linked to stockpiling ahead of the earlier 29 March exit deadline. Figures for April to June showed a downturn in growth in these areas, likely due to companies running down stockpiled inventories.

But adverse though Brexit uncertainty has undoubtedly been, is this the full picture? Might there be other anchors weighing on Scotland’s economic performance?

Longer-term figures highlighted by economist Professor John McLaren in his bulletin Scottish Trends point to a more problematic conclusion: that well before “Brexit blight” set in, our performance begs deeper questions.

He points out that since 2014 – well before the UK-wide EU referendum vote – Scotland’s GDP growth rate has been half that seen for the UK. Some of this under-performance, he notes, will be due to a slump in North Sea activity, with more than 50,000 jobs lost across the UK oil sector as a whole between 2014 and 2018. But widespread slower growth – under half that seen in the UK for all private service groupings, he writes – “suggests other forces are also at play”.

Taking a longer period, the 20 years 1998 to 2018, Scotland’s wayward performance is more stark. Over this period, real-terms GDP growth in Scotland totalled 32 per cent, while for the UK it was 46 per cent, a difference of 14 percentage points.

Our manufacturing sector performed relatively better (if still subdued), growing by eight per cent over the period against just one per cent for the UK. But Scotland’s construction growth lagged that for the UK by 23 percentage points and services by 21 per cent.

Business and financial services in Scotland trailed those for the UK by 11 per cent, while transport and communications saw real terms growth of 54 per cent, dwarfed by the 104 per cent expansion scored by the UK.

Particularly striking is the data for the Scottish hospitality sector, a relatively small but increasingly important area of growth and employment. The sector, says McLaren, saw next to no real terms growth over this 20-year period, while at UK level it has grown by almost 50 per cent. A statistical anomaly? Or special factors such as the London Olympics at work?

Business and financial services growth in Scotland has lagged behind that of the UK since 2010, possibly due to the contraction after the global financial crisis. But this growth gap has worsened since 2014. And the health and social work sector, despite considerable political attention and big boosts to the NHS budget, has seen falling output in per capita terms since 2012.

So, stronger in some areas, notably worse in others, and this over a 20-year period which cannot be easily explained away by Brexit. There may well be reasons why over the past year or so Brexit uncertainty has had a more deleterious effect in Scotland – farming, for example – but these longer-term comparisons point to more deep-seated factors affecting our variable performance when compared with the rest of the UK – and that more forensic analysis is needed than simply crying “it’s Brexit”.