Grant Allan & Stuart McIntyre, Fraser of Allander Institute, Department of Economics, University of Strathclyde
This post also appears on our Nowcasting blog: http://www.nowcastingscotland.com
Following the release of the Fraser Commentary last week, today we release the results of our latest nowcasts of the Scottish economy. These are the first to incorporate data on economic activity in June into our estimates, and thus do capture the first week after the Brexit vote. We have also produced our first estimate for Q3 (Jul-Sept), although the nowcast next month will be the first to include data on activity in Q3 itself, and so at this stage we can think of these as estimates based on previous activity and estimates.
- 2016 Q2 nowcast is 0.29% which, at an annual rate, is 1.17%. This is down on our last nowcast.
- 2016 Q3 is 0.38% which, at an annual rate, is 1.51%.
In terms of what these suggest about current Scottish growth, three things are worth reiterating.
Firstly, with the closure of Longannet Power station on March 24th 2016, we are expecting Scottish GDP to take a one-time hit. We do not capture electricity generation within our nowcasting model, and so we will not be picking this up in our estimates. Nevertheless, as we suggested here, we expect this one-time event to reduce GDP by up to 0.4% in Q2. What this means is that to avoid a contraction in the Scottish economy the rest of the economy would have to be growing by more than 0.4%.
We are not seeing any evidence of this in our results, indeed our Q2 nowcast (0.29%) is significantly below rate that would be required to avert a contraction in Q2. We have said before that one shouldn’t be overly concerned from an economic perspective about a one—off change in GDP resulting from the closure of Longannet, this represents a ‘levels’ change rather than a fundamental contraction in the Scottish economy.
Secondly, we are continuing to see significant underperformance in the Scottish economy relative to the rest of the UK and also relative to Scotland’s own long—term growth rate. The UK economy as a whole is at or above trend growth rates, and has been for some time. This is not true of Scotland. The Fraser Commentary released last week made clear that there are challenges requiring a robust policy response from both the Scottish and UK Government. What needs to be done by each, are perhaps worth reiterating in full here:
- “…the Bank of England and HM Treasury will be required to step forward with an immediate stimulus to counterbalance the headwinds created by both the economic and policy uncertainty and the financial market volatility.”
- “…the UK Government has to set out its clear intentions and realistic objectives for the negotiation process. If businesses and investors can be reassured that the mechanisms and processes to negotiate the UK’s exit from the EU are sound and that the overall approach will be to preserve close economic linkages with Europe, this will go a long way to reducing some of the uncertainties.”
- “…in time the Scottish Government will need to clarify its own plans for the constitution to avoid adding to the existing uncertainty. At the same time, it must review its domestic policies for growth in the light of the referendum outcome, including any stimulus measures of their own (e.g. re-profiling infrastructure projects).”
Thirdly, the first official statistics on growth in 2016 Q1 were released this month. We blogged about these, including the nature of recent revisions, here. We have been clear that our nowcasting model tends to overestimate economic performance, and thus in interpreting the results we have to bear this in mind. Nevertheless, as we showed here, recent revisions to Scottish GDP have moved the official data closer to our nowcast estimates.
That the Scottish economy is struggling is not news, and hasn’t been for over a year now. That it continues to consistently underperform the UK economy, and has been diverging in recent quarters, is a real worry. The headwinds of the Brexit fallout are still to hit the rest of the UK economy, but hit they will. As the major market for Scottish exports, what happens in the rest of the UK will impact on Scotland’s economy, while future negotiations between the UK and the European Union will shape Scotland and the UK’s short- and long-term economic future.