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Fraser of Allander
Institute
Economic Commentary
Vol 42 No 3Fraser 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 2046-5378Summary
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 2Scottish 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 InstituteFraser 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 4Table 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 InstituteChart 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 6Chart 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 InstituteChart 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 8Chart 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 InstituteScottish 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 10Chart 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 InstituteChart 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 12Table 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 InstituteChart 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 14Chart 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 InstituteChart 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 16Chart 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 InstituteOur 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 18Table 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 InstitutePolicy 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 20GVA 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 InstituteSecondly, 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 22You can also read
