Today’s Fraser of Allander Economic Commentary in 10 bullet points

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Today – in partnership with Deloitte – we published our latest Economic Commentary.

Alongside our analysis of the Scottish, UK and global economies, we include the following articles:

  • Could a reduction in alcohol consumption be good news for the UK economy? – Kevin Connolly, Katerina Lisenkova and Peter G. McGregor, FAI.
  • Performance of high growth firms in Scotland – Jennifer Turnbull and Kenny Richmond, Scottish Enterprise.
  • The output gap: what is it, how can it be estimated and are they fit for policy makers’ purposes? – Julia Darby and Stuart McIntyre, University of Strathclyde.

Today’s Commentary also includes an examination of the Scottish Government’s new Five Year Financial Strategy – which will be the subject of a blog later on today.

In this blog, we summarise some of the key points from our latest outlook.

01 Forecasts infographics

  1. The latest official data has confirmed that 2017 was another year of weak growth in the Scottish economy – and the 3rd consecutive year of Scotland lagging behind the UK

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  1. On balance, we are cautiously optimistic that 2018 will mark a better year.

Our latest forecast is for growth of 1.2% in 2018 and 1.3% in 2019 and 2020.

This still means that we expect growth to remain below trend for the foreseeable future and to lag behind the growth rate most other forecasters are predicting for the UK as a whole.

But Scottish growth should pick-up on last year.

Our latest forecast also puts us ahead of the government’s own official forecaster the Scottish Fiscal Commission.

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  1. That being said, next week’s quarterly GDP results for Q1 2018 are likely to be relatively weak – remember for comparison UK growth for the same period was just 0.1%.

As we discussed back in March, the bad weather will knock a few points off the growth rate for the first three months of the year.

The key point is that such impacts are likely to be temporary and any weather related effects should bounce back in Q2.

The chart below shows what happened back in Q4 2010 – the last period of poor weather. Construction activity was particularly badly hit but the impact was reversed 3 months later.

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It will be important therefore not to read too much into next week’s quarterly figures – we’ll need to wait until the next set of GDP figures are published in the autumn before we have a complete picture of the underlying health of the Scottish economy.

  1. Scottish exports should continue to be supported by a relatively robust global economy

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Although there are clearly risks to the outlook, not least from the potential for a trade war to develop between the US and its major trading partners.

In contrast to this global picture, we have a UK economy that is now growing much more slowly.

As the chart shows, UK economic growth in the first three months of 2018 was just 0.1% – the slowest growth since the end of 2012. Part of the explanation for these weak figures will no doubt have been March’s bad weather, but as the chart highlights the UK economy has been cooling for some time.

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  1. Much has been written about how the downturn in oil and gas has been a key factor holding back Scotland’s economic growth.

But in recent times, it has been weak growth in services and a sharp fall in construction that have been the sources of Scotland’s economic challenges.

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  1. Overall, we find the official statistics on the Scottish construction sector difficult to believe.

The official data published by the ONS supposedly shows an unprecedented period of growth in construction activity – primarily infrastructure – during 2014 and 2015, and then a sharp fall since.

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We find the scale of such changes odd – for example, output apparently grew 30% in a three year period….an unprecedented period of growth including the housing boom of the mid-2000’s.

It’s also not supported by other data. For example, the chart below shows the time series of the ONS data for construction output in Scotland with jobs data for construction. Apparently, we had very large increases in construction output with no employment created.

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We think that both ONS and the Scottish Government need to offer a better explanation than they have done thus far for such trends (particularly when it is has the potential to impact on Scotland’s headline growth figures).

  1. One positive area in recent times has been the strength of Scottish exports, which grew strongly in 2017.

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But against this, business investment continues to fall sharply and is down by around 25% in real terms since 1998.

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  1. Weak levels of business investment is one reason why Scotland’s productivity performance continues to lag behind.

We discuss Scotland’s recent productivity performance in more detail in the report and the important role of sector and industry specific drivers.

What we conclude is that whilst it is important to focus upon the ‘high-end’ of the productivity distribution, many of our largest sectors are toward the lower end of labour productivity. We need policies for these companies too.

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  1. On balance, the majority of business surveys and indicators of consumer confidence are more optimistic than three months ago (or are at least less pessimistic)

For example, whilst our latest FAI-RBS Scottish Business Monitor did dip during the first quarter of 2018, expectations for the next 3 to 6 months are more positive.

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And after a lull at the start of the year, the PMI for Scotland hit a ten month high in May.

Arguably of greater significance, our oil and gas survey was the most positive it has been in nearly 5 years. Whilst there are clearly significant challenges for the sector over the long-term, the immediate outlook is more optimistic.

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  1. Finally, it is impossible to ignore Brexit

In the commentary we argue that with just nine months to go until the UK leaves the EU, the lack of a coherent plan from within Whitehall about the UK’s long-term economic relationship with our most important trading partner risks holding back Scotland’s recovery.

Irrespective of whether you agree or disagree with the decision to leave the EU, the uncertainty caused by this lack of clarity is making it extremely difficult for businesses to develop contingencies or plan for the future.

But we also argue that Brexit cannot be used as an excuse for all our economic challenges. Hopefully the recent debates on Scotland’s economic future sparked by the Sustainable Growth Commission and others have illustrated the value of fresh thinking and new ideas irrespective of the constitutional settlement.

June 20, 2018