Download UK Trends - Scottish Enterprise

Economic Commentary – March 2012
_____________________________________________________________________________________________________
Monthly Economic Commentary



US recovery strengthening, mild recession
forecast for the eurozone
Rising oil prices an unwelcome headwind
Scottish GDP is forecast to grow at 0.4% in 2012
Global Trends
A number of indicators suggest that the US economy, the
world’s largest, is continuing to recover. GDP growth was
revised upwards to 3% for Q4 from an original estimate of
2.8% and more than 200,000 new jobs were created for
the third consecutive month in February. Over the last six
months the unemployment rate has fallen from 9.1% to
8.3%, the lowest rate since 2009. A key service sector
business activity survey reached its highest level for a year
in February and consumer confidence is rising.
In contrast, a number of European economies are
struggling, and the European Commission has revised its
eurozone growth forecasts downwards. Zero GDP growth
for 2012 for the EU as a whole is now expected and, within
this, a contraction for -0.3% for the eurozone area. The
zone’s unemployment rate is now at a record high
(10.7%). A softening global economy, sovereign debt
issues and fragile financial markets are all to blame for
expected weak performance. For the latter, although the
European Central Bank has been providing cheap loans to
EU banks, lending in turn to households and businesses
has not increased. Germany is one brighter spot where the
economy is still forecast to grow by 0.6% this year, despite
a sharp fall in demand for its exports from outside the
eurozone.
China, the world’s second largest economy measured in
terms of GDP, has reduced its growth target to 7.5% for
2012. This is the first time this target has not been 8% for
eight years. One reason is the slowdown in demand for
Chinese exports, particularly from Europe. Elsewhere in
Asia, Japan’s GDP contracted by -0.7% in 2011 and its
trade balance fell into deficit for the first time in more than
30 years due to soaring fossil fuel imports following the
Fukushima disaster. Within a context of weak export
orders and spare capacity, the Bank of Japan is increasing
its quantitative easing programme.
The rising price of oil is a major headwind facing all the
major economies. Currently sitting at over $125 a barrel,
the highest level since 2008 (and up 12% since the start of
this year), there are fears that continued high prices could
endanger economic recovery. Prices are rising as a
consequence of increasing tensions in the Middle East,
particularly a threatened embargo on Iranian oil exports to
the UE. Iran’s oil production is at a 10 year low as
sanctions disrupt the industry. A consequence of rising fuel
prices is that consumers have less discretionary income to
spend on other goods and services, and firms input costs
go up.
As a small, open economy, Scotland’s growth prospects
depend a great deal on the global economy. While the
improving outlook in the US is likely to have a positive
impact (the US is one of Scotland’s major export
destinations), the deteriorating outlook in Europe, our
major export area, may have a negative impact. As in
other economies, rising fuel prices will affect household
budgets and business input costs.
UK Trends
The EC has left its 2012 growth forecast for the UK
unchanged at 0.6% for and the OECD are currently
forecasting growth of 0.5%. Business surveys point to
modest growth in Q1 with both manufacturing and service
sector activity increasing in February. Perhaps worryingly
for manufacturing, input prices rose at their fastest monthly
rate in more than 19 years due to increasing oil prices,
with many firms having to absorb these higher costs.
The number of people out of work rose by 28,000 over the
three months from November 2011 to January 2012,
taking the unemployment rate to 8.4%. Public sector
employment fell by 37,000, with private sector employment
up by 9,000. The number of people working full-time fell by
50,000 and the number working part-time increased by
59,000. Car manufacturing is still performing strongly with
Jaguar Land Rover announcing plans for 1,000 new jobs
at Halewood, Merseyside to support growing demand for
exports.
According to the Federation of Small Businesses, SME
confidence has been improving, despite rising input costs.
Their survey of more than 3,000 members showed
confidence rising for the first time in a year, with more than
half of members aiming to grow in the next 12 months and
a third aiming to increase capital investment. However, the
survey noted that plans to expand could be under threat
from rising input costs, weak customer demand and the
cost and availability of finance.
Higher wholesale funding costs have led some of the UK’s
largest mortgage lenders to increase their mortgage rates.
Lenders would usually wait for an increase in the Bank of
England’s base rate before increasing their mortgage
rates, but expectations that interest rates will remain low
for months have forced their hand. Higher mortgage
payments, alongside continuing below inflation wage rises
and higher unemployment, will put further strain on
consumer spending.
Scottish Trends
The latest Scottish Government ‘State of the Economy’
report highlighted that although the economic recovery
continued throughout 2011, it was at substantially below
trend rate. Looking ahead, the report notes that the
strength of Scotland’s recovery will depend on events in
the key export markets of the UK, US and EU. Private
investment will also be a key feature in offsetting the
impact of changes in the public sector.
____________________________________________________________________________________
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.
Economic Commentary – March 2012
_____________________________________________________________________________________________________
Against the background of the eurozone financial crisis,
the Fraser of Allander Institute revised its forecast of GDP
growth down to 0.4% for 2012 (just below the average of
independent forecasts for the UK of 0.5%). Scottish GDP
is now -3.3% below the pre-recession peak while the UK’s
is down -3.6%. Since the recession, the performance of
Scottish economy has tracked the UK’s more closely than
in the past.
The latest labour market figures for the three months to
January show Scotland’s unemployment rate continuing to
climb faster than the UK’s. Over the quarter to January
2012, the number of people out of work increased by
6,000 taking the unemployment rate to 8.7% (higher than
the 8.4% for the UK). Youth unemployment was also up
6.7 percentage points over the year to Nov-Jan 2012. The
latest figures show that about 103,000 people aged
between 16 and 24 are out of work, including around
36,000 in full-time education. The number of people in
employment fell by 14,000 and the employment rate fell by
-0.3% to 70.8%.
Latest business survey data from the Bank of Scotland
showed that output and employment in private sector
businesses accelerated in February. Output increased in
both manufacturing and services, although overall growth
was slightly below the UK level. While new export orders
were broadly unchanged compared to the beginning of the
year, the survey noted that unfavourable exchange rate
movements had reduced the competitiveness of Scottish
goods in international markets. In the service sector, job
creation increased at the fastest rate since July 2007,
although manufacturing employment fell slightly for the first
time in more than two years. Overall, job creation grew for
the fourth month in a row at a slightly faster rate than the
UK.
Depressed consumer confidence contributed to the worst
February retail sales performance since the Scottish Retail
Consortium’s survey began in 1999. Food sales did well,
however, non-food sales fell by 4.4%. Big ticket items
suffered the most. Total sales were down 0.6% on
February last year, lagging well behind the rest of the UK
where sales rose by 2.3%. Continued pressure on
household budgets, and uncertainties about employment
prospects, are believed to be undermining any boost to
consumer confidence from falling inflation.
Scottish SME confidence has improved according to a
FSB survey, and small businesses north of the border are
more confident than the UK average. According to the
FSB, a key issue for Scottish businesses is the easing of
credit flow and the need for banks to meet their lending
targets for small and medium-sized businesses. More than
one in five firms cited access to finance as a major barrier
to growth.
The latest figures from the Committee of Scottish Clearing
Bankers on new business start-ups showed that volumes
were down 4.5% in 2011 compared to 2010. The total
number of start-ups fell by 702 from 15,439 to 14,737.
Figures showed a decline across Tayside, East of
Scotland and West of Scotland and an increase in
Aberdeen City and Shire and South of Scotland.
Access to Finance
The Bank of England’s (BoE) reported that the stock of
lending to UK businesses declined in the three months to
November 2011, down 1.5% compared to the same period
the previous year. The BoE also noted that credit
availability was likely to worsen in the near future as
conditions for banks in longer-term wholesale funding
markets are challenging, primarily reflecting the euro area
financial crisis that has been feeding through to higher
loan pricing on new loans to some businesses (i.e. it is
costing banks and other lenders more to borrow money,
and this is being passed onto businesses).
Latest figures on Project Merlin, an agreement between
the British Government and five of the major UK high
street banks on lending targets to businesses, shows that
SME loan values totalled more than £74.9bn in 2011, short
of the £76bn target. Data for Scotland estimates that only
4.8% of this went to Scottish SMEs, despite Scotland
accounting for 6.4% of the UK’s SMEs.
In February and March, Scottish Enterprise questioned
300 of its account managed businesses about access to
debt funding issues. The main findings included:
 Almost 30% of companies were seeking, or had
sought, loans or overdrafts over the last 12 months most were looking for bank loans or overdrafts.
 The amounts sought ranged from £20,000 to £3 million
- the average was £330,000 and the median £120,000.
 Of those looking for funds, half wanted to use them to
fund working capital and more than 40% wished to
invest in plant, machinery and premises.
 Compared to their previous attempts to access funding,
61% found this attempt more, or much more, difficult.
 Only half raised the full amount they were looking for,
with 20% able to raise part of the funds required. 30%
could not raise any funding
 As a consequence, a number of projects/investments
had been scaled down and a few have been cancelled.
 Of the 70% of companies that had not attempted to
raise funds, 55% did not require to at present and 25%
were using internal, personal or alternative funding
sources. Only 12% stated that they did not try to
access debt funding because they felt that conditions
would be too stringent or that they would not be
successful.
Strategy & Economics, March 2012
____________________________________________________________________________________
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.