With the production industries shrinking it was the services sector that swung into action, growing by 0.3 per cent, keeping the headline result positive.
That’s just about the only positive we can draw from the latest GDP data because we now know that the economy actually shrank in Q3. No-one should put too much weight on just one data point but a fairer reflection is that GDP expanded by just 0.2 per cent in the last nine months. Growth has largely ground to a halt.
The reason for this slowdown is clear to see. The effect of falling oil prices have been massive as billions of pounds of investment has been cancelled. The cost cutting kicked off in late 2014 but accelerated through the second half of 2015 as the oil price plummeted further. The news that more people lost their jobs in the oil & gas supply chain than originally thought contributed to the downgrade of Q3 GDP.
But what started as an oil & gas industry issue has now undeniably spread across the rest of the economy. Aberdeen might still be at the forefront of the downturn but it’s clear the whole Scottish economy is slowing down. Even this quarter’s stand-out performer, the services sector, is struggling compared to the UK data. Services output is up 0.8 per cent over the last year in Scotland, whilst the UK equivalent has grown at three times that rate.
It isn’t all doom and gloom. Households are benefiting from low inflation. The average car owning household has saved £400 since June 2014 on the basis of cheaper fuel alone. It’s no surprise that consumer facing businesses are performing well.
What does all this mean for the outlook? I expect 2016 to be the toughest year for Scotland’s economy since 2009. Weaker global growth is dampening activity far beyond the oil & gas industry and that is feeding through into our broader economic performance. The Scottish Business Monitor reported that four in ten firms saw their output fall in the first quarter of this year. For the first time services firms were no more confident than producers. The storm clouds are gathering.
• Sebastian Burnside is senior economist at Royal Bank of Scotland