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Economic Commentary – July 2012
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Monthly Economic Commentary
 Growth in US and emerging economies losing
momentum
 IMF downgrades UK prospects
 Scotland is back in recession
Global Outlook
There is continued deterioration in the global economic
outlook with data over the last month less positive for all
the major economies. The eurozone remains a key source
of uncertainty for both advanced and emerging economies
and is affecting trade and investment decisions.
In the US, the world’s largest economy, the economic
recovery is losing momentum, with continued weaker than
expected employment and manufacturing performance.
The main manufacturing activity index dropped sharply in
June indicating a contraction in output, the first decline in
almost two years. US employment increased by 80,000 in
June, and although an improvement on the previous
month’s growth, it was still below expectations. The
unemployment rate for June remained unchanged at 8.2%.
In the eurozone, Scotland’s main overseas trading partner,
the focus has been centred on instability in Greece and
Spain. In Greece, the new pro-austerity coalition
government only has a slim majority and fears still remain
about the possibility of a Greek default on its loans and/or
an exit from the euro and the wider uncertainty these could
cause. In Spain, one of the zones biggest economies, the
strength of the banking sector has been under pressure as
a result of a number of bad property loans, and a €100bn
banking bailout has been promised by the EU. Uncertainty
therefore remains high in the eurozone and there are
concerns about weaker growth in countries that have
previously been quite buoyant.
Eurozone business survey index data for June highlight
the deepening downturn, with activity contracting for the
fifth consecutive month. Manufacturing sector activity
worsened as new orders and employment declined.
Service sector activity also declined, but at a slightly
slower pace. Of particular concern is slowing growth in
Germany, recently the powerhouse of the eurozone
economy, where the business activity index fell to its
lowest level in three years. The index has declined for the
tow months running. Eurozone unemployment increased
further in May, largely due to job losses in France and
Spain. The zone’s unemployment rate now stands at
11.1%, its highest level on record.
Recent data confirmed that growth in emerging markets is
loosing momentum, reflecting ongoing difficulties in the
Eurozone and the slowdown in the US.
In China,
economic growth slowed to 7.6% in Q2 2012, down from
8.1% in the previous three months. Although this is high
by advanced economy standards, it’s the slowest pace of
growth in three years. A weak housing market and
subdued demand for exports were the main causes.
Weak export demand, most notably from key trading
partners in North America and Europe, is affecting China’s
manufacturing sector.
Japan, the world’s third largest economy, had a strong first
quarter with GDP rising 1.2% after being flat in the final
quarter of 2011. The strong performance was helped by
an increase in consumer spending due to government
incentive schemes. However, growth is unlikely to be
maintained as the effects of the scheme fade, global
demand weakens and the strong yen dampens export
demand.
UK Outlook
The IMF downgraded its forecast for UK economic growth
from 0.8% to 0.2% for 2012. It has also reduced its 2013
forecast to 1.4%. The IMF believes that UK prospects
have deteriorated in recent months, with the ongoing
problems in the eurozone, the UK’s biggest trading
partner, cited as the main cause.
UK inflation, measured by the Consumer Price Index, fell
to 2.4% in June, down from 2.8% in May. This is the third
months in row that the CPI has fallen and the rate is
moving closer to the Bank of England’s (BoE’s) 2% target.
Lower fuel, clothing and food prices all contributed to the
fall. This may ease pressures on consumer spending,
although average wage rises are still lower than the
inflation rate, and input prices for businesses.
The BoE announced in July that it will extend its
quantitative easing programme by £50 billion to give a
further boost to the UK economy, taking QE to a total
amount of £375 billion. QE involves buying UK
government bonds from other institutions (such as pension
funds and banks) to create funds that these institutions
can in turn lend. Buying bonds drives up prices and
reduces long term interest rates, which should reduce
borrowing costs. As well as QE, the BoE also announced
two schemes to provide cheaper funding for commercial
banks to address falls in lending to businesses and
households. Via loans from the BoE to commercial banks,
the aim is that this additional funding will then be lent out
to businesses and households. However success depends
on whether businesses and households are confident
enough to borrow in the current uncertain climate.
Latest UK business survey data indicates deterioration in
the services, manufacturing and construction sectors. All
three have experienced weaker activity levels on the back
of falling levels of new orders. Conditions remain fragile in
the manufacturing sector, with activity falling in June
following a contraction the previous month. The UK’s
services sector continued to grow during June, however by
a much slower rate and business confidence was
generally lower. The construction sector experienced a
sharp drop in activity, with output falling at its fastest pace
in over two years. Although some of the decline may be
attributed to the additional Jubilee bank holiday in June,
the ongoing eurozone crisis, weaker global demand,
uncertainties over the UK economy and the reluctance
among businesses to commit to new spend were cited as
the main factors.
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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 Joanne Liddle ([email protected]) or phone 0141
228 2242.
Economic Commentary – July 2012
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In the labour market, employment stood at 29.35 million in
the three months to May 2012, an increase of 181,000 on
the previous quarter. Unemployment fell by 65,000 to
reach 2.58 million. The ILO unemployment rate now
stands at 8.1%, down from 8.3% in the previous quarter.
Youth unemployment (16 to 24 year olds) fell by 10,000 to
1.02 million (this includes those who are in full-time
education and looking for work). The youth unemployment
rate now stands at 21.9%.
Scottish Outlook
Scottish GDP fell by 0.1% in Q1 2012, following a similar
fall in the last quarter of 2011 meaning that Scotland is
back in recession. The falls though were not as sharp as
for the UK as a whole (-0.3% in Q4 2011 and -0.4% in Q1
2012). Although there was growth in both Scotland’s
production (+1.2%) and services sector (+0.2%), the
construction sector contracted sharply and output fell by
6.9%.
Independent forecasts for the Scottish economy have
recently been downgraded due to uncertainty in the global
economy. The Scottish ITEM Club is predicting growth of
0.3% for 2012 and 1.1% for 2013, slightly more pessimistic
than the Fraser of Allander’s forecasts of 0.4% and 1.5%
respectively.
The Lloyds TSB Business Monitor indicates that the
Scottish economy is stagnating. In the three months to
May, 32% of business reported an increase in turnover,
35% reported no change and 33% reported a decrease.
The net balance of -1% is a slight improvement from the
-6% recorded in the previous quarter. Activity in both the
production and service sectors marginally improved.
Export activity, however, significantly improved and
expectations for the next six months are positive.
Although there has been some slight improvement, overall
the survey suggests a continued slow recovery.
The latest Bank of Scotland PMI business survey for June
showed Scottish private sector activity rebounding after a
slowdown in growth in May, when growth dropped to a 17month low. Both the manufacturing and service sector
output expanded in June and employment levels also rose
across all sectors. Scotland also outperformed the UK as
a whole. New orders increased marginally but export
orders fell, highlighting the challenges of maintaining
growth during the global slowdown.
The total number of people in employment in Scotland in
the three months to May is 2.49 million, an increase of
9,000 over the previous quarter. Scotland’s employment
rate now stands at 71.4%, above the UK average of
70.7%. Unemployment fell by 4,000 over the three months
to May 2012 with a total of 215,000 people out of work.
The ILO unemployment rate now stands at 8%, below the
UK average of 8.1%. Youth unemployment increased by
5,000 over the year (Mar-May 12) to reach 86,000. The
youth unemployment rate is now 20.8%.
Performance of SE Account Managed (AM) Customers
Scottish Enterprise regularly seeks feedback from our
account managed companies on performance and
expectations in relation to turnover, profits, employment
and exports. Over the April to June 2012 quarter, the
majority of AM companies reported increased turnover and
profitability and employment levels.
Looking ahead,
expectations for turnover, profitability and exports
remained fairly positive (see chart). However, the
proportion of firms expecting an increase has fallen
compared to previous quarters, suggesting lower business
confidence.
Performance & Expectations April to June 2012
(% of firms reporting an increase)
80%
67% 72%
60%
50%
54%
56%
44% 44%
40%
37%
20%
0%
Turnover
Profitability Employment
Last Six Months
Exports
Next Six Months
Around 60% of firms surveyed over the quarter are
exporters and two fifths (40%) reported an increase in
exports in the six months prior to survey. Just over half
(55%) anticipate an increase in exports over the coming
six months. Looking at export performance over the last
four quarters, there has been a notable drop in the net
proportion of firms reporting a rise in exports in the most
recent quarter.
Export Performance (Last Four Quarters)
80%
The Index of Manufactured Exports decreased by 0.6% in
Q1 2012. The biggest contribution to the fall was from
food and drink (-2.9%). On an annual basis to the end of
March 2012, the total volume of manufactured exports
increased by 4.2%.
The Scottish Retail Monitor results for June show that total
sales increased by 1.2% on last year, a weak performance
as the mild and wet weather dampened demand. Scottish
sales have been weaker then the UK as a whole for 15th
months running.
60%
51%
48%
53%
37%
40%
20%
0%
-20%
-8%
Jul - Sept
2011
(base: 387)
-13%
-13%
-16%
Oct - Dec
2011
(base: 95)
Jan - Mar
2012
(base: 423)
Increase
Decrease
Apr - Jun
2012
(base: 119)
Strategy & economics
July 2012
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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 Joanne Liddle ([email protected]) or phone 0141
228 2242.