Paul Smith is a senior economist at IHS Markit, where he helps to oversee the production of business survey data for over 30 countries. His research interests include nowcasting and the role that new sources of information (particularly so-called ‘big data’) can play in helping to understand current economic conditions.
In the run-up to June’s EU Referendum, there was considerable, and at times colourful, debate on the various long-term impacts, both economically and politically, for the UK should there be a majority voting to leave the EU.
However, when it came to thinking about the short-term those on the remain side pointed to what seemed a near universal consensus amongst economists: a vote to leave would trigger some rather nasty short-term impacts, mainly in the form of a weaker pound, a deterioration in financial conditions, and deterred investment emanating from the uncertainty over what the future terms of trade with Europe (and the rest of the world) would look like. The chances of recession or a period of protracted sub-par economic growth would subsequently be raised markedly.
Following the vote to leave, many institutions have reacted by slashing their forecasts for 2016 and beyond (including the FAI). However, the question on how the vote has ultimately impacted on activity is in essence an empirical one with the answer to be found within the usual economic data flow.
However, widely-used official figures, such as GDP, industrial production and retail sales, tend to be subject to revision and are inherently backward-looking: they are produced well after the period they refer to (especially in Scotland).
Therefore using such sources to understand what is happening today is limited, a problem especially acute for decision-makers making policy or investment decisions.
Likened to trying to drive a car by looking through the rear window, such issues with official data are well known and, in times of potentially rapid change, attention therefore turns to qualitative indicators that are produced quickly but can still offer reliable signals in underlying conditions.
With this in mind, two important pieces of economic data have been released over the past week regarding Scotland’s economic performance in the immediate period following the vote.
Bank of Scotland PMI
Firstly, the closely watched Bank of Scotland Purchasing Managers’ Index (PMI) survey – which features data collected from a panel of around 500 manufacturing and service sector companies in Scotland – offered a rather mixed bag in terms of how the economy fared in July.
On the one hand, the headline index from the survey, the PMI, which measures month-on-month changes in combined manufacturing and services output, registered a four-month low of 49.2, down from 50.5 in June. Posting below the 50.0 mark that separates growth from contraction, the index maintained the trend of broad stagnation apparent throughout much of the past year-and-a-half.
But in the context of the rest of the UK, the Scottish index held up well.
The fall of 1.3 points compared to a UK average of 5 points (the equivalent UK index declined sharply from 52.5 in June to 47.5 in July). Regions such as London and the South East saw their PMIs sink to lows not seen since the height of the Great Recession in early 2009.
However, a deep-dive into the details of the survey revealed more worrying trends.
New business, often seen as a leading indicator of output, fell to the greatest degree for nearly four years, led by an especially sharp decline in manufacturers’ order books. Often panellists commented that clients were suddenly wary of committing to new contracts given the uncertainty created by the Brexit vote.
Operating expenses also rose markedly as a weaker sterling (approximately 15% down year-on-year on a trade-weighted measure) raised the relative price of a range of imported goods, such as fuel. Again manufacturers suffered primarily, with costs in this sector rising to the greatest degree for nearly three-and-a-half years. Margins narrowed, with firms often struggling to pass on these higher costs as competitive pressures remained high and demand subdued.
Markit Scotland Report on Jobs
A second survey, the Markit Scotland Report on Jobs, which is based on the responses from around 100 Scottish recruitment consultants, offered additional insight into the effects of Brexit uncertainty.
The survey showed that permanent job placements made by Scottish companies declined to the greatest degree in seven years. Panellists widely reported that the pipeline of permanent positions had dried up, linked in part to the uncertainty created by the vote.
But in contrast temporary placements rose at a solid and accelerated rate therefore delivering an interesting message: firms in July seemed inclined to hedge against Brexit-related uncertainty by offering more flexible temporary contracts to new workers rather than commit to long-term permanent arrangements. Moreover, these contracts were offered with only a modest increase in pay compared to those issued in previous months. The July data provide (admittedly tentative) evidence of a potential turn in bargaining power towards companies and away from workers.
Overall it remains a little early to fully understand the ramifications of the vote, but the July PMI and Jobs surveys are important to economists in being able to offer a first insight into how conditions are evolving.
While the PMI data point to a relatively better performance than others areas of the UK in July, and offers some support for the current view of a rise in Scottish Q3 GVA of around 0.3%-0.4%, the detailed data from the July surveys are not especially encouraging given the underlying weakness in orders, rising cost pressures and the drop in permanent jobs placements.
And against the backdrop of relative fragility following a period of underwhelming performance over the past year-and-a-half, especially compared to the UK as a whole, Scotland seems set for an ongoing period of economic turbulence in the months ahead