Fraser of Allander Institute - Economic Commentary
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Fraser of Allander Institute Contents Economic Commentary 2 3 4 Summary At a glance Outlook and appraisal 5 7 9 Global economy UK economy Scottish economy 10 13 17 Scottish economy Scottish labour Focus: FAI Brexit dashboard market survey 18 20 Our forecasts Policy context For regular analysis on the Scottish economy and public finances please see our blog www.fraserofallander.org Copyright © University of Strathclyde, 2018. 1 Fraser of Allander Institute ISSN 2046-5378
Summary After a sustained period of weak growth and Our forecasts are based upon a broad-based despite ongoing political uncertainty, the Scottish agreement between the UK and the EU. Should this economy has been showing some signs of not happen, then our forecasts are likely to change strengthening. significantly. With so many different factors – both economic and political – about what a ‘no-deal’ This trend has continued over the summer. may look like, we have not forecast this scenario at As we discussed in our last commentary, in recent this stage. An update will be provided in December months we have seen evidence of a short-term when more details are known. pick-up in the rate of economic growth in Scotland. As we have argued before, in our view, a Growth over the year to June 2018 – whilst still ‘hard-Brexit’ would act as a significant drag on below average – was the fastest since late 2014/ Scotland’s – and the UK’s – economic potential. early 2015 and the Scottish economy has outpaced Many of the impacts, such as weakened supply the UK for the last two quarters. chains, reduced flow of skilled workers, trade While we remain cautiously optimistic, growth is barriers, and lower levels of international likely to remain below trend for the duration of our investment will set in gradually. forecast horizon. However, it is the risk of a ‘no-deal’ scenario that And overall, the immediate outlook for Scotland’s is of most concern in the immediate term. Whether economy remains highly uncertain. you agree or disagree with the decision to leave the EU – or the final agreement the UK should On the one hand, wages across the UK have started negotiate with the EU – the need for an orderly to pick-up, whilst the global economy remains in transition is vital. strong health which should boost Scottish exports. As both the Chancellor of the Exchequer and the Tourism numbers continue to go from strength to Governor of the Bank of England have agreed, a strength. And the majority of measures of business ‘no-deal’ outcome would cause hardship for many confidence we track have been on the rise, albeit firms, workers and families across the UK. from very low levels. Sleepwalking into a ‘no-deal’ outcome cannot be On the other hand, despite being less than six viewed as an effective economic plan. months from the UK leaving the EU, the lack of clarity on the UK’s future relationship with its Now is the time for effective and strong leadership largest external market continues to cast a shadow from all our political leaders. over the outlook. Fraser of Allander Institute As a result, whilst we are forecasting – in our base September 2018 case – growth of 1.3% this year and 1.4% in 2019 and 2020, we would stress the heightened degree of uncertainty around such point estimates at the current time. Economic Commentary, September 2018 2
Scottish growth forecast Unemployment forecast We expect growth to remain below trend. 2018 4.2% Job down from 4.3% Market 2019 4.2% down from 4.4% 1.4% 1.4% 1.4% 2020 4.3% 1.3% down from 4.5% 2019 2020 2018 Fraser of Allander Institute At a glance Chart: Scottish growth (since 2013) – year and quarter Chart: Employment & unemployment rates, May - July 2018 3.0% Employment (16-64) Unemployment (16+) Scottish quarterly GDP growth 2.5% Year Year Rate (%) Rate (%) Scottish annual GDP growth (q on q) Change Change 2.0% Scotland 75.1% ▼ 4.1% ▲ 1.5% ▲ ▼ % change England 75.8% 4.0% 1.0% Wales 74.8% ▲ 3.8% ▼ 0.5% N. Ireland 69.3% ▲ 4.0% ▼ 0.0% UK 75.5% ▲ 4.0% ▼ -0.5% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 2014 2015 2016 2017 2018 Chart: FAI forecast Scottish economic growth range Table: FAI forecast Scottish economic growth (%), 2018 – 2020 4% 2018 2019 2020 Forecast 3% GDP 1.3% 1.4% 1.4% 2% Production 1.5% 1.6% 1.5% Construction 1.0% 1.1% 1.0% Annual GVA Growth 1% Services 1.2% 1.4% 1.3% 0% -1% -2% -3% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 3 Fraser of Allander Institute
Fraser of Allander Institute Outlook and Appraisal As we argued back in June, there have been welcome signs of a gradual pick-up in activity in the Scottish economy after a sustained period of weak growth. Indeed, the most recent data point to Scotland’s economy outpacing growth in the UK as a whole. These figures are clearly welcome, although below the surface businesses are becoming increasingly worried about the costs of a ‘no-deal’ Brexit. Chart 1: Scottish growth since 2013, year and quarter Introduction 3.0% Scottish quarterly GDP growth The Scottish economy grew by 0.5% in the 3-month 2.5% Scottish annual GDP growth (quarter on same period to June 2018 – ahead of the UK for the 2nd quarter in previous year) 2.0% consecutive quarter. (Chart 1 and Chart 2) 1.5% Growth over the year was the fastest since late % change 2014/early 2015. Revisions for 2016 and 2017 1.0% lifted the official growth estimates much closer to 0.5% our own forecasts. (Chart 3) 0.0% As outlined in June, we are slightly more optimistic -0.5% about Scotland’s near-term economic prospects Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 than this time last year. 2013 2014 2015 2016 2017 2018 Source: Scottish Government & FAI calculations On balance, our central view is that the Scottish economy is showing greater signs of resilience. Table 1: Employment & unemployment rates, May - July 2018 Why? Employment (16-64) Unemployment (16+) First, whilst there is undoubtedly heightened Year Year Rate (%) Change Rate (%) Change uncertainty around Brexit, many businesses appear to be ‘looking-through’ such concerns and are Scotland 75.1% ▼ 4.1% ▲ getting on with day-to-day activities. But this is England 75.8% ▲ 4.0% ▼ clearly fragile. And the apparent lack of contingency Wales 74.8% ▲ 3.8% ▼ planning by many firms is a significant concern. N. Ireland 69.3% ▲ 4.0% ▼ UK 75.5% ▲ 4.0% ▼ Second, the outlook for oil and gas – and its all- Source: ONS important supply chain – remains more positive than it has been in almost three years. Chart 2: Scottish economic growth revisions, 2010 — Q1 2018 Third, there are signs that the recent upturn is 112 relative broad-based with most sectors currently posting positive returns. 110 Previous series 108 We forecast that growth will continue at around its Revised series 106 current pace for the next 2 to 3 years. Index Q1 2010 = 100 104 Of course, some of this upturn is cyclical and follows 102 a sustained period of weak growth. The greatest 100 risk to this forecast is from a no-deal Brexit. Whilst not sharing some of the concerns of the most 98 pessimistic commentators regarding the potential 96 negative hit to the economy should this happen, 94 2010 2011 2012 2013 2014 2015 2016 2017 2018 we do think that a cliff-edge scenario would have serious short-term – and long-term – negative Source: Scottish Government & FAI calculations consequences for the Scottish economy. Economic Commentary, September 2018 4
Table 2: IMF forecasts for growth (%), 2017 (outturn) to 2019 The global economy 2017* 2018 2019 Whilst the pace of growth in the world economy has UK 1.7 1.4 1.5 slowed slightly, particularly in emerging economies, US 2.3 2.9 2.7 the outlook remains robust. Japan 1.7 1.0 0.9 Canada 3.0 2.1 2.0 Most predictions are for world growth to continue to Euro Area 2.4 2.2 1.9 be close to, or slightly above, average over the next Germany 2.5 2.2 2.1 couple of years. (Table 2) France 2.3 1.8 1.7 The slight easing in world growth seems to reflect a Italy 1.5 1.2 1.0 movement toward a more balanced type of growth, *Outturn. Source: IMF rather than a more significant slowdown. There has been a gradual shift toward more sustainable drivers of growth such as trade, investment and wages across most major economies. Chart 3: Euro-zone unemployment rate and real GDP since 2006 14 118 At the same time, some structural problems – such 12 114 as unemployment in Europe – whilst still significant, continue to be slowly addressed. (Chart 3) Real GDP, Indexed, 2010=100 10 110 Unemployment rate (%) 8 106 Overall sentiment and demand in Europe remains high and well ahead of the UK. (Chart 4) 6 102 4 98 Across the Atlantic, the US continues to power ahead driven by more confident households and 2 Euro-zone unemployment rate (LHS) Real Euro-zone GDP (RHS) 94 increasing investment. President Trump’s tax cuts 0 90 have helped to provide a significant fiscal stimulus. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (Chart 5). US unemployment is on track to fall to its Source: Eurostat lowest rate in around 50 years. Without Brexit, such factors would be pointing toward a highly positive outlook for Scottish exporting firms over the next few months. Chart 4: Business confidence in the UK’s major markets Chart 5: Contributions to US growth, Q1 2012 — Q2 2018 104 7 Consumption Investment Net exports Government GDP G7 China US Euro Area 6 5 Annualised growth rates (% change) 102 Net balance (> 100 = optimism) 4 3 100 2 1 98 0 -1 96 -2 -3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 94 2002 2004 2006 2008 2010 2012 2014 2016 2018 2012 2013 2014 2015 2016 2017 2018 Source: OECD Source: U.S. Bureau of Economic Analysis 5 Fraser of Allander Institute
Chart 6: Policy rates in UK, US and Europe, 2013 — 2021 Of course, there are risks to this outlook. 3.0 Expectations (now) The Trump administration’s decision to increase 2.5 Early summer tariffs on some European and Chinese imports, has expectations 2.0 escalated trade tensions. Official interest rate (%) 1.5 US Fed Funds Rate Early summer expectations The short-run impact of a trade war may be more 1.0 modest than one might expect (relative to the geo- BofE Bank Rate Expectations now political consequences). But the potential damage 0.5 Early summer to long-run prospects for growth is a concern. expectations 0.0 ECB Refinancing Rate The strength of global growth has led to increased Expectations -0.5 ECB Discount Rate now speculation about a gradual return to normality in -1.0 interest rates. (Chart 6) 2013 2015 2017 2019 2021 Source: Thomson Reuters Datastream & FAI calculations The US Fed increased rates by 25 basis points in June, with two further hikes pencilled in for 2018. The ECB plans to taper its QE programme, marking the first step in the unwinding of its emergency support efforts. Chart 7: Bad loans in Europe, 2016 and 2018 But a combination of fiscal consolidation, 350 70% Non-performing loans [LHS] (2016) Non-performing loans [LHS] (2018) weak productivity, bad loans – Chart 7 – and Bad loans Ratio [RHS] (2016) Bad loans ratio [RHS] (2018) 300 60% demographics is likely to mean that the ‘neutral Non-performing loans (Euros bn) interest rate’ in most economies will remain lower Non-performing loans ratio 250 50% than pre-crisis averages for at least a decade. 200 40% 150 30% Equity prices have bounced back following their correction in February. Volatility has subsided and 100 20% risk appetite has been strong. (Chart 8) 50 10% Consequently, overall financial conditions have 0 0% remained highly supportive. Our colleague Gary Koop has co-developed a Source: European Central Bank financial accounting index which draws on data such as equity, corporate bonds and interbank spreads. It shows general financial conditions remain highly supportive. (Chart 9) Chart 9: Koop and Koroblis Financial Conditions Index, 2000 — Chart 8: Stock market indices, Jan 2013 — Aug 2018 2018 (values < 0 = supportive, values > 0 = restrictive) 200 6 STOXX EUROPE 600 Global STOXX ASIA/PACIFIC 600 5 180 Distance from averages since 1991 (s.d) S&P 500 Emerging economies 4 FTSE 100 160 Advanced economies Index, Jan 2013 = 100 3 140 2 1 120 0 100 -1 80 -2 2013 2014 2015 2016 2017 2018 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: Thomson Reuters Datastream Source: Bank of England Economic Commentary, September 2018 6
Chart 10: Monthly UK economic growth to July 2018 The UK economy 1.2 1.0 For the first time, in July the ONS published UK GDP on a monthly and rolling 3-monthly basis. 0.8 % change on previous month 0.6 The results require careful interpretation. 0.4 Firstly, the latest UK figures might not always follow 0.2 the ‘traditional’ calendar quarters of Q1, Q2 etc. 0.0 So growth comparisons – including with Scotland -0.2 – need to ensure a like-for-like basis. Secondly, -0.4 month-to-month results will be volatile. (Chart UK monthly GDP Rolling three month growth -0.6 10). One-off events – e.g. weather – could have Jul Jul Jul Jan Mar Jun Jan Mar Jun Jan Mar Jun May May May Feb Feb Feb Apr Apr Apr Aug Sep Aug Sep Oct Oct Nov Dec Nov Dec significant impacts on the headline results. 2016 2017 2018 Source: ONS Up to July, rolling 3-month growth of 0.6% was the highest since last summer. This pick-up follows a challenging start to 2018, and weak growth through 2017, when the UK lagged behind other G7 economies. (Chart 11). Chart 11: Annual GDP growth in G7 countries, 2016 – 2017 3.5 Within sectors, performance has been mixed. Change in growth between 2016 & 2017 Growth in 2016 Growth in 2017 3.0 Manufacturing output fell over both the quarter and the year. Annual growth (% and percentage points) 2.5 With manufacturing activity still lower than a decade 2.0 ago, any hope of boosting exports substantially – 1.5 and to the government’s target of 35% of GDP – is 1.0 hugely optimistic. (Chart 12) 0.5 A strong performance from consumer facing 0.0 activities, driven by factors such as the good weather, boosted the summer growth numbers. -0.5 Canada France Japan USA Germany Italy UK The growth in consumer activity has also been Source: ONS & OECD boosted by an upturn in real earnings. But conditions remain challenging for many in the sector. Over the year to July, real terms regular earnings increased by 0.5%. (Chart 13) Chart 12: UK manufacturing output, Jan 2008 — Jul 2018 Chart 13: Real and nominal earnings growth, Jan 2007 - Jul 2018 110 6 5 Earnings growth (% change on a year earlier) 105 Nominal regular earnings Real-terms regular earnings 4 100 3 Index, 2016 = 100 2 95 1 90 0 Manufaturing monthly output -1 85 -2 Manufacturing 3-month average 80 -3 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: ONS Source: ONS 7 Fraser of Allander Institute
Chart 14: Contributions to the UK savings ratio, 2013 — 2018 That being said, average regular pay remains around 12 12 £11 per week lower than prior to the financial crisis 10 10 – and over £30 less when bonuses are included. 8 8 6 6 As a result of this squeeze, the UK savings ratio (the 4 4 proportion of income not spent each quarter) is at Percentage (%) 2 2 £ billion 0 0 its lowest level in over 50 years. (Chart 14) -2 -2 -4 -4 Some of the rise in wages is undoubtedly driven by -6 -6 the tight UK labour market. -8 -8 -10 -10 Unemployment of 4 per cent is the lowest since the 2013 2014 2015 2016 2017 2018 winter of 1974-75. Households' final consumption expenditure Adjustment to pension entitlements Gross disposable income Gross Saving Saving ratio (%) (RHS) Whilst welcome, there is increasing evidence that Source: ONS this is posing recruitment challenges and wider capacity constraints. (Chart 15) The number of people in work continues to grow, but there is also evidence of a fall back in the number of Chart 15: Bank of England Agent Scores: capacity constraints & EU nationals in employment in the UK. (Chart 16) recruitment difficulties since August 2007 4 Whether or not this is part of a ‘Brexit effect’ remains Recruitment difficulties unclear. Reports from the Bank of England’s network 3 Capacity constraints of agents suggests that companies are becoming 2 more uncertain about the outlook, with a fall-back in Bank of England Agents Score 1 investment intentions. Contingency planning, whilst 0 modest, is intensifying. -1 This backdrop of fragility – albeit counterbalanced -2 by positive indicators of current activity – will set the context for the upcoming 2018 UK Budget. -3 -4 Whilst borrowing continues to fall (Chart 17), with -5 debt still above 80% of GDP, and rising pressures 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 on health and social care costs, the Chancellor does Source: Bank of England not have his challenges to seek. Chart 16: Change over year in employment by nationality, Apr- Chart 17: UK public sector net borrowing by financial year, Jun 2017 — Apr-Jun 2018 2014/15 to 2018/19 100 14-15 EU nationals 90 15-16 80 16-17 Cumulative borroiwng (£bn) 70 Non-EU nationals 17-18 60 18-19 (year to date) 50 OBR forecast for PSNB ex All in employment 40 2017 to 2018 30 20 OBR forecast for 18/19: £37.1bn UK nationals 10 0 -150 -50 50 150 250 350 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Change from same period a year ago 2018 2019 Source: ONS Source: OBR Economic Commentary, September 2018 8
Chart 18: Scottish GDP since 2016 The Scottish economy 0.75% 106 105 The latest Scottish GDP growth figures were 0.50% 104 published last week (19th September). (Chart 18) 103 They showed a further pick-up in growth, with Indexed Q1 2016 = 100 0.25% 102 the Scottish economy expanding 0.5% over the Growth (%) 101 3-months to June. This followed revised growth of 0.00% 100 0.4% in the first 3-months of the year. 99 -0.25% 98 These figures (consistent with the latest survey Quarterly growth (LHS) Scottish GDP Level (RHS) indicators) show further evidence of the first 97 1998-2007 trend growth (RHS) sustained period of expansion since the downturn -0.50% 96 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 in early 2015. Indeed, growth over the year to June 2016 2017 2018 2018 was the fastest since late 2014/early 2015. Source: Scottish Government & FAI calculations That being said, annual growth of 1.7% (quarter-to- quarter) and 1.4% (4Q-on-4Q), still lags Scotland’s long-term historical growth rates. Chart 19: Scotland vs. UK economic growth since 2013 The Scottish economy has outpaced the UK for the 6% Scottish/UK quarterly growth difference last two quarters and over the year as a whole. Scottish/UK GDP cumulative difference 4% Some of this, reflects a degree of cyclical catch-up, % change (and % point >0 = Sco > UK) Scottish/UK GDP per head cumulative difference with the UK having grown more strongly over the four 2% years to late 2016, shown in Chart 19. 0% But the upturn has been broad-based. Over Q2, -2% there was growth of 0.6% in production activities, 1.8% in construction and 0.4% in services. -4% With services making up over 75% of activity – it is -6% no surprise that Scotland’s overall rate of growth has Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 been shaped by services. (Chart 20) 2013 2014 2015 2016 2017 2018 Source: Scottish Government & FAI calculations Some of the improvement in the Scottish numbers undoubtedly reflects a more positive outlook for oil and gas than last year – albeit cutbacks continue to be made. (Chart 21) Chart 21: Capital and operating expenditure in the North Sea, Chart 20: Composition of growth over year and latest quarter 1998-99 to 2017-18 1.6 16,000 Services 1.4 14,000 Construction Operating expeniture 1.2 12,000 £ million (nominal terms) Production Capital expenditure 1.0 10,000 Agriculture, forestry & fishing % point change 0.8 8,000 6,000 0.6 4,000 0.4 2,000 0.2 - 0.0 -0.2 Past quarter Past year Source: Scottish Government & FAI calculations Source: Scottish Government & FAI calculations 9 Fraser of Allander Institute
Scottish Economy Dashboard % of Growth Key issues/trends Economy 2017 Q2 2018 Production 17% 1.9% 0.6% Manufacturing 11% 1.7% 0.9% ■■Confidence and growth has returned recently – boosted by a more positive outlook for the oil and gas supply chain ■■Exporters likely to continue to benefit from weak pound and strong global economy. But also most likely to be at risk from dislocation of UK-EU trade Food and drink 3% -0.7% 4.0% ■■Sector continues to grow strongly – and is now at its highest ever level ■■Growth potential is high, although boosting productivity in sector will be key for sustainability ■■Future post-Brexit challenges could include ‘just-in-time’ deliveries and access to migrant workers Services 76% 0.9% 0.4% Retail and 10% 1.4% 1.1% ■■Aggregate data suggests a recent upturn in sector activity wholesale ■■Micro data suggests tough trading conditions, with many high-profile names on the high street struggling ■■Rising wages could give some respite to a sector going through significant structural change Accommodation 3% 0.3% -0.2% ■■Mixed performance with growth over the year, but some fall-back in the most recent quarter & food services ■■Like retail, many casual eating and drinking establishments have been struggling. Changes in how households consume entertainment is impacting many business models ■■Tourist faring elements of the sector continue to improve Financial & 6% -1.3% 1.1% ■■Relative modest output in this key sector of the Scottish economy insurance ■■Unlike other sectors directly exposed to the financial crisis – such as professional services and real estate – financial services has taken much longer to get back on its feet ■■Uncertain future for financial services in relation to trading with Europe, even under the ‘Chequers’ plan ■■Significant revisions to official data paint a more positive picture for sector than before ■■Uplift in public sector capital investment should help Construction 6% 4.3% 1.8% support infrastructure, but wider measures of activity – including commercial property and house-building – remain relatively subdued ■■Sector grew in 2017 but is arguably most exposed to any hit to migration post-Brexit Agriculture 1% 4.5% -1.2% ■■Sector will need clarity on support, opportunities and regulation post-Brexit to ensure growth can continue Economic Commentary, September 2018 10
Chart 22: Manufacturing and Food & Drink in Scotland, Q1 2013 But there is also increasing evidence of a wider — Q2 2018 recovery. For example, manufacturing grew by 115 0.9% over the quarter and by 3.2% over the year on 4Q-on-4Q basis. 110 A key driver of this has been the strong growth in Scotland’s food and drink sector. The sector has Index 2013 Q1 = 100 105 grown 3.0% over the year on a 4Q-on-4Q basis to 100 reach its highest ever level. (Chart 22) Whilst electricity and gas supply activity has slipped 95 back a little in the most recent quarter, growth was Manufacturing Food & Drink strong over the year buoyed by renewables output. 90 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Within services, growth has been more modest but – 2013 2014 2015 2016 2017 2018 for the most part – broadly positive. (Chart 23) Source: Scottish Government & FAI calculations Retail and accommodation and food sectors have picked-up. Whilst positive, it is clear from wider indicators that such sectors continue to find trading Chart 23: Growth in services over quarter and year conditions challenging. 3.5 Quarterly change If the rise in earnings continues to build momentum, 3.0 2.5 Annual change then this should provide some respite. However, 2.0 many of the challenges that they face are more 1.5 structural and relate to the way in which people % change 1.0 now choose to consume such services (e.g. online 0.5 0.0 retailing). -0.5 One sector which returned to growth was financial -1.0 -1.5 services, which grew by 1.1% in Q2. But as Chart 24 highlights, the sector continues to lag behind its counterparts, such as real estate and professional services. (Chart 24) Source: Scottish Government & FAI calculations That said, Scotland’s financial services industry appears to be no different in operating on a slightly smaller scale – post financial crisis – than the UK sector. (Chart 25) Chart 24: Financial services in Scotland since the crisis Chart 25: Financial services in Scotland since the crisis 140 115 110 130 105 120 Index 2006 Q1 = 100 Index 2006 Q1 = 100 100 110 95 100 90 90 85 Financial services Real estate Professional services Scottish financial services UK financial services 80 80 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Scottish Government & FAI calculations Source: Scottish Government, ONS & FAI calculations 11 Fraser of Allander Institute
Chart 26: Revisions to construction GDP, Q1 2010 = 100, Q1 Revisions to Scottish construction data 2010 — Q2 2018 135 Back in June, we discussed the puzzling patterns in 130 the Scottish construction series. 125 The official Scottish Government data had been 120 showing a sharp rise in construction activity during Index Q1 2010 = 100 115 2014 and 2015 – by around 30% - before falling back in 2017 and 2018. 110 105 The scale of such changes was unprecedented. 100 New construction data The government had hypothesised that the figures 95 were driven – in part – by a number of major Old construction data 90 infrastructure projects coming to an end (such as the 2010 2011 2012 2013 2014 2015 2016 2017 2018 Queensferry Crossing and M8 upgrade). Source: Scottish Government & FAI calculations But even with expanded borrowing powers, and growing capital budgets, this was always difficult to reconcile with activity on the ground and what other Chart 27: Revisions to GDP growth, %, 2011 – 2017 data was telling us. 3.0% old GDP growth In August, the statistics were revised substantially Revised down Revised up 2.5% new GDP growth (Chart 26). The official data now show construction growing since 2014, with only a modest decline in 2.0% recent times. Annual change (%) 1.5% As a result, even though construction accounts for just 6% of our economy, the revisions were of such 1.0% a large scale that they changed the entire profile of 0.5% growth in the Scottish economy. (Chart 27) 0.0% In June, the Scottish Government published growth estimates for 2017 of just 0.8%. Now that figure is -0.5% 2011 2012 2013 2014 2015 2016 2017 1.3%. Source: Scottish Government & FAI calculations That being said, the changes do not alter Scotland’s long-term growth profile (with GDP per head still rising by just under 2% over the decade). Chart 28: Commercial property transactions in Scotland, 2007- Revisions are an important and necessary part 08 to 2017-18 of producing robust economic statistics. And 6 6,000 there are advantages in making major changes to Volume of Transactions (RHS) Value of Sales (LHS) methodology at set points in time. 5 5,000 These data have wider implications with sustained Total number of transactions Total value of sales (£ bn) 4 4,000 weak economic performance unlocking emergency borrowing, depending on the performance of the 3 3,000 economy. 2 2,000 So one lesson is perhaps the need to revise more 1 1,000 quickly if the official methodology is clearly and significantly inconsistent with wider evidence. 0 - Double checking a suite of data, e.g. commercial transactions, actual Scottish Government data on Source: National Registers of Scotland infrastructure spending, housing completions etc, should provide a more accurate picture. (Chart 28) Economic Commentary, September 2018 12
Table 3: Scotland and UK labour market, May - Jul 2018 Scottish labour market Employment Unemployment Inactivity rate rate rate Unemployment in Scotland remains low and, taking (16-64) (16+) (16-64) the confidence intervals around headline estimates Scotland 75.1% 4.1% 21.7% into account, effectively no different from the UK. Quarterly change (pp) -0.1 -0.2 0.3 But over the last year, there has been a degree of Annual change (pp) -0.8 0.3 0.5 weakening in labour market outcomes. Employment UK 75.5% 4.0% 21.2% has fallen by around 40,000, whilst there has been a Quarterly change (pp) -0.1 -0.2 0.3 rise 7,000 in unemployment. (Table 3) Annual change (pp) 0.2 -0.3 0.0 One big success story for the labour market in Source: ONS, LFS Scotland in recent years has been substantial drops in youth (16-24) unemployment. Scotland currently has the lowest 16-24 unemployment rate of anywhere in the UK. (Chart 29) One feature we have discussed in past Chart 29: 16-24 unemployment rate, Apr 2017 - Mar 2018 commentaries, has been the rise in part-time work 16 and self-employment, with a corresponding relative 14 squeeze on the number of full-time employees. Interestingly, over the last year to 18 months this Unemployment rate, 16-24 (%) 12 10 trend has eased. Instead, the number of employees 8 has been on the rise, as has the number of full-time 6 workers. (Chart 30) 4 The fall in employment, alongside the revisions to 2 GDP growth by the Scottish Government, has led to 0 a bounce back in Scotland’s productivity numbers. Labour productivity in Scotland is nearly 4% higher than this time last year. Source: ONS, APS However, these revisions do little to alter Scotland’s relatively weak track record in productivity – with last year’s boost counterbalanced by weaker than before estimates for productivity in earlier years. (Chart 31) As a result, productivity in Scotland is largely back at 2011 levels. Chart 30: Number of employees and self-employed in Scotland since 2007 Chart 31: Revised productivity estimates, Q1 2010 — Q1 2018 2,300 340 106 2,280 320 105 2,260 300 104 Number of people in self-employment Number of people in full time work 2,240 280 103 Index 2010 Q1 = 100 2,220 260 102 2,200 240 101 2,180 220 100 2,160 200 99 2,140 180 98 Employees (LHS) Self-employed (RHS) Revised productivity statistics Old productivity statistics 2,120 160 97 2,100 140 96 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: ONS, LFS Source: Scottish Government 13 Fraser of Allander Institute
Chart 32: Components of Scottish Productivity, 1998 — 2017 Over a longer time horizon, productivity has lagged 140 behind wider growth in the economy. The slack has been picked up by rising employment. (Chart 32) 130 But with an ageing population, employment at near 120 record levels, and uncertainty over the future of Index, 1998 = 100 migration post-Brexit, it is not difficult to see why 110 turning around Scotland’s productivity performance 100 is so crucial to future prosperity. 90 Gross value added Greater efficiency, not just in high value added Output per hour sectors, but across our economy will be key. (Chart Average weekly hours worked in whole economy 80 33) Source: Scottish Government Latest Scottish indicators Over the summer, indicators of day-to-day activity in the Scottish economy have held up relatively well. This backs up the assessment we made in June that, Chart 33: Growth in employment from 1997-2017 and GVA per despite Brexit uncertainty, underlying economic hour worked in 2016, size of circle indicates the number of workers in that sector conditions have strengthened a little. We retain that cautious optimism. The relative size of circles indicates the number of workers in that industry (2017) 70 Financial & Some of this is undoubtedly tied to a more positive Insurance 60 outlook for oil and gas. But there are also signs that GVA per hour worked 2016 (£/hr) 50 Manufacturing activity has been stabilising or picking-up across the Education Information & Transportation & Storage Other Services Communication wider economy. 40 Health Public Administration For example, at 55.5, the RBS Purchasing Managers 30 Wholesale & Retail Professional, Index (where >50 marks expansion; 50 = expansion) 60 association with RBS – highlights a similar picture. 55 The latest results for new and repeat business continue to grow. (Chart 36) 50 Optimism is also on the rise. 45 One exception to this was the latest Federation of Scotland London Other S. East regions and devolved nations S. West Small Businesses Scotland confidence index which East Wales W. Midlands E. Midlands 40 UK Yorkshire N. East N. West N. Ireland fell from plus 5.1 points to minus 13.2 points with 2016 2017 2018 Scottish businesses amongst the most concerned in Source: Royal Bank of Scotland & IHS Markit the UK about a no-deal Brexit. Economic Commentary, September 2018 14
Chart 35: Quarterly Economic Indicator: business optimism, Q3 One advantage of our Business Monitor is the ability 2014 — Q2 2018 to track trends in activity over time. The survey has 40 been running on a consistent basis since 1998. It 30 therefore provides a valuable record of conditions in the Scottish economy. Net balance of respondents (%) 20 10 Over time, we find that – on balance – most firms 0 tend to report costs rising ahead of turnover. Clearly this cannot happen forever, and shows an inherent -10 nervousness built into most firms’ interpretation of -20 current conditions (i.e. they tend to be more worried -30 about costs rather than opportunities). (Chart 37) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018 What is revealing however, is where the gap widens Retail Construction Manufacturing Tourism Financial & Business services and narrows and how closely this tracks Scotland’s Source: FAI & Scottish Chambers of Commerce growth record. When the gap grows - e.g. 2008/09 and 2015/16 – growth slows. When the gap narrows, growth tends to pick-up. Another advantage of our Business Monitor, is the Chart 36: Scottish Business Monitor: repeat and new business, Q1 2013 – Expected Q3 2018 ability to track ‘hot topics’ over time. 30 Access to finance and access to workers is just one Net balance (above 0 = activity growing/optimism improving) 25 element. We find a sustained fall in the number of 20 firms citing credit availability as an important issue 15 10 for them (but rise in concerns over staff availability). 5 (Chart 38) 0 One interpretation of these data is that the current -5 -10 period of heightened uncertainty is leading -15 businesses to meet any increase in demand by -20 taking on more workers, rather than investing in new Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 plant and machinery. 2013 2014 2015 2016 2017 2018 Repeat Business New Business Expecations Repeat Business Expectations New Business These data pose questions for recent efforts – such Source: FAI-RBS Scottish Business Monitor as the new Scottish National Investment Bank and British Business Bank – to boost the supply of finance. Our survey suggests that demand for credit is likely to be just as important. Chart 37: Scottish Business Monitor: turnover and costs, Q1 Chart 38: Scottish Business Monitor: credit and staff availability 1998 — Q2 2018 important/very important, Q1 1998 — Q2 2018 100 90 Trend in turnover Trend in costs Credit availability important/very important Staff availability important/very important 85 80 80 60 Net balance of responses 75 % responses important/very important 40 70 65 20 60 0 55 -20 50 45 -40 40 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: FAI-RBS Scottish Business Monitor Source: FAI-RBS Scottish Business Monitor 15 Fraser of Allander Institute
Chart 39: Consumer Sentiment Index current conditions: the One area of ongoing fragility is around consumer economy, household finances and spending, Q2 2013 — Q2 and household confidence. 2018 40 Scottish households’ assessment of current Scottish Economy conditions remains weak – although they have at least stabilised in recent times. (Chart 39 and 40). Net balance of responses (>0 = positive) 30 Household Finances 20 For comparisons the GfK indicator for August 2018 Household Spending was -13. 10 It would appear that the key driver of the slightly 0 more pessimistic outlook is households’ -10 expectations for the economy. -20 In contrast to their expectations for their own Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 finances (which remain positive), an increasing 2013 2014 2015 2016 2017 2018 number believe that the outlook for the economy is Source: Scottish Government negative. (Chart 41) The outlook for the labour market however, remains positive. (Chart 42) Chart 40: Consumer confidence in Scotland and the UK, Jan 2016 – Aug 2018 The latest Royal Bank of Scotland Report on Jobs 5 shows its headline indicator for labour market UK Scotland activity remains above its 12 month rolling average. 0 -5 This should help – in time – put upward pressure on real wages, bolstering household incomes. -10 Net balance -15 -20 -25 -30 2016 2017 2018 Source: GfK Chart 41: Consumer Sentiment Index expectations: Scottish economy, Q2 2013 — Q2 2018 Chart 42: Jobs market indicator, Jan 2013 — Aug 2018 50 70 Scotland 40 68 UK 30 66 Scotland 12m moving average Barometer (>50 = expansion) 20 64 % of households 10 62 0 60 -10 58 -20 56 -30 54 -40 52 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 2014 2015 2016 2017 2018 50 2013 2014 2015 2016 2017 2018 Outlook for Scottish Economy (Better) Outlook for Scottish Economy (Worse) Source: Scottish Government Source: RBS & IHS Markit Economic Commentary, September 2018 16
Chart 43: What has been the impact of the Brexit decision, to Focus: FAI Brexit survey date, on your business? In July, we undertook a survey of Scottish firms to assess their preparedness for Brexit. Over the course of the month we spoke to around 350 businesses from across the country and from a Negative change No change 49% variety of different sectors. 44% The focus of the survey was not on whether or not businesses believe Brexit to be good or bad, but instead, how their preparatory plans were taking shape. Around half of the businesses we spoke to said that Positive change 6% the decision so far had no impact on their business activity. Only 6% said it had been positive, with 44% Source: Fraser of Allander Institute saying the impact had been negative. (Chart 43) 33% of firms said that it has had a negative impact on current investment activity (4% positive), with 41% saying that it has had a negative impact on new Chart 44: How has the Brexit decision affected… investment (3% positive). You starting any new business projects? 33% indicated that it has had a negative impact on staff recruitment (3% positive). (Chart 44) Your ability to retain existing staff? Brexit is happening, like-it-or-not. So it is vital that New staff recruitment? businesses prepare for such an eventuality. We asked firms about their preparedness for Brexit. Any proposed new investment activity? Only 38% said that they believed that they were Your current investment activity? prepared for Brexit. (Chart 45) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% We also asked about the level of information that is % of responses available to them to make such preparations. Negatively No change Positively Source: Fraser of Allander Institute The overwhelming response was that there is not enough information currently available to enable them to plan for potential Brexit outcomes. ‘Uncertainty over the UK Government’s objectives Chart 45: Do you feel that your business is prepared for Brexit? in the negotiations’ was the most popular response amongst businesses (with over 59% citing this as a factor). Finally, in terms of possible opportunities. Whilst 51% of business surveyed indicated that they did No Yes 38% not see any immediate benefits, 28% of those 62% surveyed believed that there might be benefits from moving away from EU regulations with 26% pointing to possible increased funding from the Scottish and/ or UK Government in the future. Only 18% thought of opportunities in new markets outside the EU. Source: Fraser of Allander Institute 17 Fraser of Allander Institute
Our forecasts Chart 46: FAI nowcast and the latest release of Scottish GDP estimates, Q1 2016 – Q3 2018 Nowcast Latest release of Scottish GDP 0.8% Average (nowcast) Average (initial release) Chart 46 shows our latest nowcasts and also how Average (latest release) 0.6% they have tracked against the official data both before and after the recent revisions to the GDP Quarterly growth 0.4% series. 0.2% Our nowcasts do a much better job of tracking the revised estimates of GDP compared to the first 0.0% estimates. -0.2% Last week’s data, confirmed that growth continued Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2016 2017 2018 into the 2nd quarter of 2018 picking up over the first three months. Source: Fraser of Allander Institute As we have discussed before, quarterly results for Scotland can be relatively volatile given the size of the economy. The latest results are therefore broadly consistent with our expectations for growth in 2018 that we Table 4: Nowcasts for Scotland’s GDP in Q2 and Q3 2018 first made back in 2017. Q2 Q3 On balance, we believe that – setting aside any risks Quarterly Growth 0.33% 0.39% from the Brexit negotiations going awry – Scotland Annualised Growth 1.34% 1.57% should be on track to grow at a broadly similar rate Source: Fraser of Allander Institute to last year (if not slightly faster). (Table 4) Turning to our forecasts for the next three years, as in the past, we report a central forecast but also uncertainty bands that set out a likely range within which we predict Scottish economic growth will lie. It is important to note that such bands are based upon historical variations in our ‘normal’ forecasting performance. Looking ahead, the potential for a ‘no- Chart 47: FAI forecast Scottish economic growth range deal’ Brexit outcome is clearly not a ‘normal’ event. 4% Forecast Should this occur, an entirely new set of forecasts 3% will be required. But with so much uncertainty over what this could mean – politically and economically 2% – we have not published such an estimate at this Annual GVA Growth 1% stage. An update will be provided in December. 0% Overall, our base forecasts are very similar to June. (Table 4 and Chart 47) -1% Table 5: FAI forecast Scottish GDP growth (%) 2018 to 2020 -2% 2018 2019 2020 -3% GDP 1.3% 1.4% 1.4% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Production 1.5% 1.6% 1.5% Source: Fraser of Allander Institute Construction 1.0% 1.1% 1.0% * Actual data to 2017. Central forecast with forecast uncertainty Services 1.2% 1.4% 1.3% for 2018 – 2020. Uncertainty bands sourced from accuracy of past forecasts at different forecast horizons. Source: Fraser of Allander Institute Economic Commentary, September 2018 18
Table 6: Latest growth forecasts for the UK economy Our central forecast is for growth of 1.3% in 2018 2018 2019 2020 followed by growth of 1.4% in 2019 and 2020. Bank of England 1.5 1.8 1.7 In short, we believe that the Scottish economy will OBR 1.5 1.3 1.3 grow this year, will quicken slightly over the forecast NIESR 1.4 1.7 1.7 horizon, but growth will remain below trend. European Commission 1.5 1.2 - Our latest forecasts for Scotland put us slightly IMF 1.4 1.5 - behind the Bank of England’s forecast for the UK Oxford Economics 1.3 1.4 2.0 economy but ahead of the OBR’s UK forecast. ITEM Club 1.3 1.5 1.7 (Table 5). Whilst we do not forecast the UK economy CBI 1.5 1.3 - directly, on balance, we believe that Scotland will do Source: HM Treasury, Bank of England, OBR well to match UK growth over the next few years. A no-deal outcome would significantly lower our forecasts as businesses adjust to this new normal. With nominal earnings growth expected to continue Chart 48: FAI GDP forecasts by sector, 2018 – 2020 to pick-up, and provided that this outpaces inflation, 2.0% household spending should see some modest GVA Production Construction Services gains. 1.6% Investment activity is likely to remain under pressure as Brexit-uncertainty continues to cast a shadow 1.2% over growth ambitions. This element of our forecast Growth carries the greatest risk and has the greatest 0.8% potential to be negatively hit should a ‘no-deal’ outcome become a reality. 0.4% Net exports and tourism are on track to continue to benefit from the low value of Sterling. 0.0% 2018 2019 2020 As in recent years, services should make the Source: Fraser of Allander Institute greatest contribution to overall growth. However, we also expect the outlook for manufacturing to continue to be more positive, particularly as optimism in the North Sea supply chain continues to improve. Building on recent growth, professional and business services are placed to do better. And with major new public investment in the pipeline, the construction sector should continue to see a more Table 7: FAI Labour Market forecasts to 2020 sustained outlook. 2018 2019 2020 Employee jobs 2,495,250 2,521,950 2,547,550 We expect unemployment to rise slightly toward a level consistent with more medium-term trends. So % employee job growth over year 1.0% 1.0% 1.0% any reported rise in unemployment in the coming months should pose little concern. (Table 6) ILO unemployment 111,400 114,150 118,900 Rate (%) 1 4.2% 4.2% 4.3% Source: Fraser of Allander Institute Absolute numbers are rounded to the nearest 50. 1 Rate calculated as total ILO unemployment divided by total of economically active population aged 16 and over. 19 Fraser of Allander Institute
Policy context Tackling regional economic inequalities Tackling regional economic disparities has been a What is stark is the variation in economic priority of successive governments in both the UK performance by UK region. GVA per head in London and Scotland. is over 70% higher than the UK average. (Chart 49) The UK Government’s Industrial Strategy is Looking at the more disaggregated data the their latest attempt, with regional growth 1 of disparity is even greater. It is clear that the UK, or 5 ‘foundations of success’. Here in Scotland, more specifically one part of London, stands as an ‘cohesion’ – or its new term ‘regional inclusive outlier in Europe. (Chart 50) growth’ – has been a feature of the Scottish Chart 50: GVA per head, difference between richest and poorest Government’s Economic Strategy since 2007. parts of EU countries (NUTS2 regions, 2016) It is hard to disagree that a country will be GDP per person (purchasing power standard) 180,000 Range economically stronger if every region has the 160,000 140,000 opportunity to fulfil its potential. 120,000 However, Scottish and UK policy history is 100,000 littered with well-intentioned – but ultimately ill- 80,000 fated – attempts to narrow the gap in economic 60,000 performance between regions. Many of the 40,000 challenges are deep-rooted and structural, whilst 20,000 attempts to tackle them throw-up challenging trade- 0 France Austria Romania Poland Portugal Spain Czech Republic Lithuania Luxembourg Slovakia Denmark Croatia Cyprus Hungary Slovenia Germany Greece Latvia Finland United Kingdom Sweden Estonia Malta Belgium Ireland Bulgaria Italy Netherlands offs and political risks. Regional inequalities in Scotland and the UK Source: Eurostat & FAI Calculations Much has been written about the unbalanced nature One might expect the dominance of London to have of the UK economy. waned following the financial crisis. If anything it has increased, widening UK interregional disparities. Scotland performs relatively well despite that context. Our onshore GDP per head was just below But before we think that this is just a London or UK £25k in 2016 - 3rd behind London and the South phenomenon, the same data also reveals the scale East. of regional inequality in Scotland. (Chart 51) Chart 49: GVA per head across the UK (2016) Chart 51: GVA per head Scotland’s NUTS 2 regions (2016) 50,000 45,000 Scottish NUTS 3 Regions Scottish Average 45,000 40,000 UK Average 40,000 35,000 GDP per head by region GVA per head (£, 2016) 35,000 30,000 30,000 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 - - Source: ONS Source: ONS Economic Commentary, September 2018 20
GVA per head in Edinburgh is nearly 2.5 times higher Policy opportunities and challenges with than in East and North Ayrshire. And over time, the Regional Inclusive Growth gap has widened. GVA per head in the capital has nearly doubled since devolution, with growth in East So one cannot help follow recent UK and Scottish and North Ayrshire around half that rate. Government initiatives and ask the question – “so what happens next?” It is hard not to be sceptical This translates into widening economic and social over any hope that current initiatives will tackle outcomes across Scotland. In North Ayrshire the wide and deep-rooted variations in economic for example, around a third of children are in performance across Scotland. households classified as being in relative poverty. Narrowing regional inequalities is not easy. The And back in 2007, the Scottish Government challenges are complex and – often – deep-rooted. established a target to narrow the gap in employment between the three ‘best‘ performing Firstly, there are a great many structural factors why and the three ‘worst’ performing local authorities in some parts of the country lag behind. Scotland. For example, the industrial mix of regions varies As the chart below highlights, a decade later, the significantly. Many of the challenges that parts of gap remains largely the same. (Chart 52) west central Scotland face can be traced to the rapid de-industrialisation of the 1970s and 1980s and a Chart 52: Difference in employment rate for the three best and worst performing Local Authorities (2004 – 2017) reliance on relatively low value service industries. 100% Social deprivation and health barriers often act as 90% self-reinforcing barriers to economic prosperity. Three best performing Local Authorities 80% Geography also plays a part, with much of Scotland subject to the challenges of rurality and remoteness. Employment rates 70% 60% Parts of our cities struggle with poor housing stock 50% Three worst performing Local Authorities and wider basic infrastructure. 40% The make-up of a region’s population can also act as 30% a significant drag on long-term growth. Some of the 20% most fragile parts of the country are on track to lose 10% population over the next few years. (Chart 53) 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Scottish Government Chart 53: Projected population growth in Local Authorities in Scotland, 2016-2026 The Centre for Regional Inclusive Growth 16 This summer the Scottish Government launched its 14 Projected Population Growth 2016-2026 Natural change Migration Population change 12 Centre for Regional Inclusive Growth. 10 8 So far this is a website. It pulls together local 6 4 information and statistics. But the Centre does not 2 (yet) offer any fresh insights into how to tackle the 0 questions that have underpinned this policy area for -2 -4 decades. -6 Dumfries & Galloway S Ayrshire E Ayrshire Perth & Kinross Moray Fife Aberdeen Glasgow Angus S Lanarkshire Clackmannanshire Renfrewshire Na h-Eileanan Siar Dundee N Lanarkshire Aberdeenshire E Renfrewshire Borders Orkney W Dunbartonshire Falkirk E Dunbartonshire W Lothian E Lothian Inverclyde Shetland Highland Stirling Midlothian Argyll & Bute Edinburgh North Ayrshire Indeed, on policy solutions, evaluation of current programmes or plans for new investment, it is silent. The website points to Regional Partnerships which are to come forward with new ideas but there is little Source: National Records Scotland detail on what resource will be made available and how ‘asks’ to central government will be acted upon. Perhaps we will see more in the upcoming Budget. 21 Fraser of Allander Institute
Secondly, local areas often lack the tools to We have seen this played out in recent months, most turnaround their economic performance (beyond visibly in the case of North Ayrshire. limited interventions at the margins). Many of the levers that will make a difference – jobs, health The decision to locate the new Medicines and well-being, population, digital and transport Manufacturing Innovation Centre (MMIC) close connectivity – are national responsibilities. to Glasgow Airport might make sense from an agglomeration and connectivity perspective. From Indeed, a quick glance at the diagnostic results an inclusive growth perspective, it passed up an from the Centre’s pilot study for North Ayrshire opportunity to support private sector activity and poses the question, “what realistic levers do local the creation of skilled jobs - as part of an Ayrshire policymakers have to effect change in these areas?” Growth Deal – in an area of the country where such (Chart 54) investment is rarely undertaken and much needed. At the same time, local government budgets The decision to locate the new Social Security have been squeezed putting pressure on local Agency in Dundee was another such example. On government jobs and wages. As local authorities this occasion, despite North Ayrshire being clearly prioritise statutory responsibilities, it is no surprise identified as scoring best for ‘inclusive growth’ it that many have scaled back support for economic was passed over by national policy makers because development. it was felt that the local authority might struggle to attract people to work there (despite transport links Chart 54: Prioritisation matrix for North Ayrshire improving). 12 Entry-level 11 skills/Work-readiness Anyone can agree or disagree with such a decision, and few would argue with the importance of 10 People to jobs (transport) Business-specific skills and Basic digital skills ensuring that the new Social Security Agency 9 Aspirations entrepreneurship Intermediate and performs effectively from day one. But it arguably Deliverability Digital connectivity High-level skills 8 Health and well-being highlights that even the Scottish Government itself – Digital innovation 7 Jobs density the key advocate of regional inclusive growth – often Goods to market Business premises Sector composition finds it difficult to back-up its vision with investment (transport) 6 Childcare and funding support. Housing 5 Migration and Population decline Finally, and an issue we have raised in previous 4 0 5 10 15 20 25 commentaries, is that in attempting to be ‘all-things- Impact to-all-people’, the policy landscape can become Source: Scotland’s Centre for Regional Inclusive Growth complex and cluttered. Interestingly, the mechanism for funding local Currently, we have a patchwork of 32 local authorities has not changed much over time, and authorities, various City-Region Deals, a new suite certainly not since regional inclusive growth has of Regional Partnerships, not to mention the large risen up the policy agenda. Perhaps that needs to number of strategies and programmes many of change? which have their own regional dimension (including 32 Single Outcome Agreements). Thirdly, there is often a basic tension at the heart of national economic policy over where resources Coordinating such activity across boundaries, are targeted, particularly in a world of tight public different tiers of government (and governance) – spending. often of different political hues – inevitably makes for a complex delivery landscape. On the one hand, prioritising policy efforts at areas of economic strength – like the strong parts of our cities – can create spill-overs, promote international competitiveness and lead to national benefits. But on the other hand, it is arguably only by shifting resources to areas in economic need that can one realistically expect gaps to be narrowed. Economic Commentary, September 2018 22
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