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Monthly Economic Commentary: China slowdown causes uncertainty
September 2015
Global Trends
increased. However, new export orders grew at a slower pace, with reduced
trade volumes with China dampening international demand.
The volume of world trade fell 0.5% in the three months to June according
to the World Trade Monitor; and the first quarter results were revised down to a
fall of 1.5%. The results are the worst recorded since the 2009 collapse in
global trade that followed the financial crisis. Much of the slowdown in 2015 has
been caused by a combination of the faltering recovery in Europe and, in
particular, a slowing economy in China. The attempted shift in China from an
export-led economy to one driven by domestic consumption, which seems to be
a slower process than many had predicted, will have longer term implications
for global trade.
Eurozone recovery seems to be on track, and is good news for Scottish
exporters as the eurozone is our biggest export market. Q2 GDP growth has
been revised upwards providing a more solid picture of activity in the first half of
the year, partly driven by stronger consumption and improvements in net trade
(helped by falling oil prices). German exports grew at their fastest rate in five
years in Q2. Business survey results showed business activity increasing at the
fastest pace in more than four years in August. Among the ‘big-four’ eurozone
economies (Germany, France, Italy and Spain) Spain recorded the fastest
growth: growth accelerated in Germany and Italy (activity in Italy increased at
the fastest rate in more than 4 years). Growth in France was more muted.
The knock-on effects from slowing world trade to US growth have so far
proven to be quite limited. In the US, the world’s largest economy, the latest
estimate of Q2 economic growth was revised up to 0.9%, a sharp improvement
from no growth in Q1; this is good news as the US is one of Scotland’s main
export markets. As domestic economic conditions and the labour market
improve, there is speculation among commentators on the timing of the first rise
in US interest rates for almost 10 years. Business survey results for August
show US manufacturing is still growing, but at its lowest rate for 22-months
amid heightened global economic uncertainty and weaker exports sales.
There is growing evidence that China, the world’s second largest
economy, is slowing down. Investment and factory output growth slowed in
the first half of the year and the latest business survey data show Chinese
manufacturers experiencing the fastest deterioration in operating conditions for
more than six years in August. China has already cut interest rates five times
since November to encourage lending and spur economic activity. However, the
impact has been limited and the slowdown is weighing on emerging market
growth, and the spillovers from this could reduce growth in Europe and the US.
Japan’s economy (the world’s third largest) is under threat from the
slowdown in China. GDP growth fell by 0.3% in Q2 with sizeable quarterly falls
in consumption, business investment and exports. The level of consumer
spending has barely recovered from the drop after the consumption tax
increase in April 2014 and falling exports largely reflect the slowing Chinese
economy. More positively, business survey data for August showed an
improvement in operating conditions at Japanese manufacturers as new order
growth accelerated to a seven-month high and production and job creation
Eurozone industrial production was up by 0.6% in the month to July,
compared to a fall in June. There were differences by country though. In the 4
largest eurozone countries, production increased in Italy (+1.1%), Spain
(+0.6%) and Germany (+0.5%), but declined in France (-0.8%). Over the year to
July, production increased by 1.9%. Concerns that recent financial market
volatility and weakness in emerging markets would derail recovery have been
eased by the ECB’s commitment to extend its QE programme if necessary.
UK Trends
PMI business survey data showed that growth in the private sector slowed
in August for the second month running. Activity increased at its slowest pace
since May 2013, driven by slower growth in both services and manufacturing.
Although service sector growth moderated for the second month running it was
still broadly consistent with the long-run average. Growth in manufacturing was
driven by domestic demand as new export business declined for the fifth
consecutive month. Companies attributed falling overseas sales to the strength
of sterling, weak sales performance to the eurozone and the slowdown in
China.
Official figures showed that industrial production fell for the second month
running in July, driven by a fall in manufacturing output (down by 0.8% over the
previous month). Manufacturing was the only main production sector to decline
with some large falls in export-focused sectors such as basic metals and
transport equipment.
Monthly Economic Commentary: China slowdown causes uncertainty
The UK’s trade deficit widened in July, growing by £2.6bn compared to June
2015, in spite of lower oil prices that have helped in recent months. The deficit
increased from £8.5bn to £11.1bn as total exports fell by £2.3bn and total
imports increased by £0.3bn. Exports of goods to EU countries fell to their
lowest level since November 2009. This was attributed to declines in exports of
oil and machinery & transport equipment. Over the 3 months to July, however,
the total trade deficit narrowed to £4.7bn from £8.9 billion in April 2015,
reflecting both an increase in exports and a fall in imports.
Exporters have been hurt by the 18% rise in the value of the pound since
early 2013; this has made British products less competitive. At the same time,
attempts to rebalance the UK economy have been impeded by the eurozone
crisis, and this is now giving way to market turmoil in China and other
(particularly emerging) markets. However, in spite of concerns over the global
economy the CBI is predicting the UK will sustain a strong recovery with
domestic demand being the mainstay. It anticipates growth of 2.6% this year
and 2.8% next year. Its growth predictions are based on the assumptions that
recovery in wages and productivity will boost consumer spending.
The number of unemployed people in the UK increased by 10,000 in the
three months to July compared to the previous quarter, although the
unemployment rate remained the same at 5.5%. Over the quarter, the number
of people in work also increased by 42,000 (and by 413,000 over the year). The
working age employment rate was 73.5%, unchanged from the previous quarter
but higher than the 72.8% rate in the same period a year ago.
Average wages increased by 2.9% compared with the same three months
last year. As inflation is low (falling to 0% in August) this represents the fastest
increase in real wages in the last decade and strengthens the case for the Bank
of England to raise interest rates. However, this is balanced against growing
concern that slowing markets, such as China, are likely to drag on UK growth
and inflation; the MPC voted to leave rates on hold at its September meeting.
Scottish Trends
Some of the main headwinds facing the Scottish economy are highlighted
in latest Scottish Government ‘State of the Economy’ report, including the
combination of the strong pound and muted demand in some export markets.
The impacts of falling oil prices are still working through the Scottish economy,
leading to cutbacks in investment and employment in the oil sector, which has
September 2015
had a negative impact on the onshore supply chain. However, it has also had a
positive impact on the wider Scottish economy by providing a boost to
household incomes and lowering costs of production. The report also notes that
underlying conditions – low interest rates and inflation; high employment; robust
investment and healthy domestic demand; alongside improving conditions in
some of Scotland’s most important export markets – point to continued
expansion through 2015. Independent forecasts reflect this predicting a
continuation of the positive growth momentum from last year: growth of around
2.4% is expected this year.
PMI business survey results show output growth moderated in August
(the weakest for four months). Domestic demand was sustained and both
manufacturing and service sectors reported growth in new business. However,
new export orders fell sharply as manufacturers felt the effect of a strong
pound.
Scottish small business confidence has fallen back notably, although still
positive, according to the Federation of Small Business Index. The proportion of
small businesses seeing a rise in turnover has declined and the net balance of
firms reporting rising profits has become negative. Although many input costs,
such as fuel and gas prices, have fallen recently this was not enough to support
profitability. Looking ahead, businesses anticipate slight improvements in
turnover and profit growth in the next three months and more favourable credit
conditions are expected, protecting firms from everyday cash flow issues to
some extent.
The number of unemployed people in Scotland remained unchanged
between May and July at 164,000; the unemployment rate stayed at 5.9%
(compared to 5.5% in the UK). Employment fell by 12,000 over the three
months, and now stands at 2,612,000. However, Scotland’s employment rate is
still higher than the UK (at 74% compared to 73.5%) although it has fallen by
0.4 percentage points over last three months. Youth employment in Scotland
has increased by 25,000 over the year and is now at its highest level for this
time of year since 2005.
Performance of SE Account Managed Companies
Scottish Enterprise regularly seeks feedback from account managed companies
on business performance. In the first half of the year over 780 companies were
surveyed.
Monthly Economic Commentary: China slowdown causes uncertainty
Overall, more than a third (36%) of companies attempted to access finance
over this period. Results by sector show that Life Sciences had the highest
proportion of companies doing this (more than 50%) while Financial & Business
Services had the lowest proportion (around 20%). All of the Financial &
Businesses Services companies and more than 80% of Food & Drink
companies were able to access the required finance, but the proportion of
Chemical Sciences companies was lower (50%). A higher proportion of
exporters than non exporters were able to access finance although a slightly
lower proportion attempted to do so.
September 2015
Of those firms reviewed in the January to June 2015 period who had sought to
access new funding in the previous six months, 74% were successful in
obtaining the funding they required. Comparing firms that completed a review in
January to June 2014 and January to June 2015, the success rate for achieving
the required amount of funding fell from 79% to 70%.
Implications for Scottish Enterprise
External risks are likely to continue over the course of 2015, with global demand
conditions influenced by slowing growth in emerging markets. Underlying data
and forecasts point to a positive outlook in Scotland for the rest of this year but
there are key headwinds facing the economy, such as the combination of the
strong pound and muted demand in a number of export markets. The impact of
low oil prices will continue to affect the Scottish economy this year. In addition
to the direct effects on jobs and investment in North Sea there will be knock-on
effects throughout the supply chain, dragging on overall output and
employment, although lower oil prices should have a positive effect on
consumer spending through increased real wages and lower production costs.
The strength of sterling makes Scottish exports more expensive and less
competitive in overseas markets. Therefore, ongoing overseas trading
conditions will remain challenging for Scottish businesses, for manufacturing
firms in particular, making it more difficult for them to break into new markets or
become first time exporters. In order to compete more effectively in overseas
markets businesses will need to focus on improving productivity, innovation and
investment.
Strategy & Sectors
September 2015
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This commentary reflects our understanding of issues at the time of writing and
should not be taken as Scottish Enterprise policy. If you have any comments or
suggestions for improvement, please email Jennifer Turnbull
([email protected]) or phone 01786 452010.