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Monthly Economic Commentary: inflation returning
Global Trends
Economic growth in the US (the world’s largest economy) continued to be
relatively robust at the end of Q3. Wage growth was also the fastest since
2009, although consumer confidence declined slightly in October on the back of
presidential election economic uncertainty. Latest business surveys show that
US manufacturing continued to expand in October, as did the overall economy.
In the labour market, the economy added 161,000 jobs, and job numbers from
the two previous months were revised upwards, reducing the unemployment to
4.9%. Overall, the generally positive performance is good news for Scottish
exporters as the US is Scotland’s single largest country for exports.
China (the world’s second largest economy) continues to grow strongly.
GDP was up by an annualised 6.7% in the three months to the end of
September, in line with expectations. Although Chinese business and consumer
sentiment has increased since September, some analysts still have concerns
around levels of debt and the continuing dependency on government spending
and investment (often in infrastructure) to support growth.
November 2016
some signs of inflation moving towards its target rate (the desired outcome of its
stimulus programme). However, the most recent data for Germany disappointed
with growth of 0.2% in Q3, half the rate in Q2 and much less than the 0.7%
seen in Q1. Q3 growth was below expectations and was driven by lower
exports although the domestic economy remained solid. It has been speculated
that uncertainty as a result of the Brexit vote may have contributed to the fall in
exports. Further uncertainty from the US election and internal EU political
uncertainty from a number of elections within the bloc next year may also
impact negatively on growth during 2017 and 2018.
UK Trends
UK GDP seems to have held up well in Q3 according to preliminary
figures. This is the first release of GDP covering a full quarter of data following
the EU referendum. Output was estimated to have increased by 0.5% over the
quarter compared with growth of 0.7% in Q2. Q3 GDP was 2.3% higher than
the same quarter a year ago. Growth was driven by services, with output in
manufacturing, other production and construction all falling.
Japan (the world’s third largest economy) saw its economy grow faster
than expected in Q3 due to higher exports. This was the third consecutive
quarter of growth and, at 0.5% over the previous quarter, was better than
forecast (0.2%). Growth was driven by overseas sales as demand within Japan
remains tepid. This lack of domestic growth has been in spite of a further large
stimulus from the Japanese government in August; and the target of 2%
inflation has been pushed back further. Without domestic growth Japan will
struggle to grow depsite a fall in the yen since the US election making
Japanese exports more competitive. Manufacturing business confidence has
improved slightly driven by international demand and new export orders.
Analysts expect the economy to grow 0.6% this year and 0.8% in 2017.
The UK’s trade deficit widened in September: over the month, exports fell by
£0.2bn while imports increased by £1.2bn (the trade deficit with the EU widened
to a record £8.7bn). This suggests that the fall in the value of sterling has not
yet resulted in a boost to overseas sales in the manufacturing or service
sectors.
Eurozone GDP grew by 0.3% in Q3. This was the same pace as the previous
quarter and close to the average of the last seven years. Over the year, output
rose by 1.6%; however, this has been insufficient to significantly reduce the
zone’s level of unemployment, currently at 16 million (the rate in September
was 10.0%, similar to the rate for the past few months). France remains a weak
point in the zone: the economy only grew 0.2% in Q2 (following contraction in
the previous quarter), but in October France was the only one of the four major
economies to record a fall in business activity (activity in Germany, Spain and
Italy rose). More positively, the European Central Bank will be encouraged by
The Bank of England has forecast that the UK will grow by 1.4% in 2017.
This is faster than the 0.8% forecast it made in August and reflects that UK
economic performance has been much more resilient following the referendum
outcome than the Bank had thought likely. However, growth of 1.4% is below
the UK’s longer term average of 1.8% over the period from 2001. Moreover,
the Bank has but cut expectations for 2018 growth to 1.5% from 1.8%: in effect
saying the negative growth from the Brexit vote will occur, just later than had
been expected previously.
Business sentiment has recovered further from its post-referendum fall
according to Bank of England Agents. However, they also state that sentiment
remains fragile and uncertainty around the long-term outlook is high. This is
feeding through to investment intentions where flat or slightly lower spend is
expected over the coming year.
Monthly Economic Commentary: inflation returning
November 2016
Inflation is returning and could increase rapidly. While currently at 0.9%, the
Bank of England forecasts it could treble to 2.7%, due mainly to the fall in the
value of sterling since the referendum as this is driving up prices of imported
goods.
comparable records began in 1971. There were 31.8 million people in work,
49,000 more than for April to June 2016 and 461,000 more than a year earlier.
Unemployment fell by 37,000 to 1.6 million over the quarter and the
unemployment rate fell to 4.8%; the lowest rate since 2005.
The UK production sector declined in September as manufacturing
struggled. Official data showed that manufacturing output fell by 0.9% over the
month, offsetting a 3.4% rise in mining and quarrying (that includes oil & gas).
Scottish Trends
UK manufacturing activity remained solid in October, with the weaker
pound boosting export orders, according to the Markit/CIPS purchasing
managers' index (PMI). However, the fall in the pound also had a "marked"
impact on raising costs. Overall confidence was down from September, but is
still positive with a growth in output and new orders supporting the fastest job
creation in a year. However, price inflation for goods bought in by
manufacturers hit its highest rate for more than five years.
Manufacturing exports have received a significant boost from the weakness
of sterling, according to the CBI. Its Industrial Trends Survey showed that
export volumes grew in the three months to October at the fastest pace for two
and a half years. Companies expect export orders to rise further over the next
three months, although the weaker pound is feeding through to costs, which are
rising briskly and may well spill over into higher consumer prices in the months
ahead. The CBI also highlighted that manufacturers are worried about a
potential shortage of skills as a result of the EU referendum result.
Business optimism hit a seven month high in October according to the
Lloyds business barometer. The survey shows a rise in overall confidence and
suggests the economy is set to grow moderately in the fourth quarter. Nearly
half of businesses report improved prospects (up from a third in September).
However, the Federation of Small Businesses reported that business
confidence was in negative territory in Q3, the first time since 2012. The
performance and outlook for the domestic economy was the main source of
pessimism, cited by two-thirds of businesses. In line with other surveys, export
optimism improved. Despite the pessimism, overall ambitions to grow were
rising and spare capacity declining, across FSB members.
The UK employment rate was 74.5% in the three months to September
2016, the same rate as the three months to June and the joint highest since
The quarterly national accounts for Scotland for Q2 shows that growth over
the last year was driven by increases in consumer spending and capital
investment. Government spending and exports also both increased. Economic
expectations and market sentiment continue to be highly sensitive to the
political process relating to the EU. The Scottish Government’s latest ‘State of
the Economy’ report highlights that the most recent Scottish data following the
EU referendum had been better than forecast, but performance is weaker than
the UK. Whilst business optimism remains weak, there are encouraging signs of
a pick-up in activity towards the end of the third quarter.
Scotland may be the only part of the UK to see a decline in employment
next year according to a report by PWC. The report states that, due to the
Brexit vote and ongoing difficulties in the oil and gas sector, overall economic
growth would slow to 0.9% in 2017 falling from a forecast of 1.8% this year. UK
growth is also set to slow significantly, mainly due to reduced investment as a
result of the increased uncertainty from the Brexit vote. The decline in the value
of sterling is also cited as the cause behind an expected inflation rate of 2.7%
by the end of 2017.
Scottish manufactured exports declined in Q2 2016. The volume of
manufactured exports fell by 0.8% over the quarter and by 3.6% on a rolling
annual basis. The annual fall was largely driven by declines in Engineering &
Allied Industries (-4.2%) and Metals & Metal Products (-26%).
Scotland's businesses remain optimistic about future growth despite
increasing political and economic uncertainty, according to the Grant Thornton
survey conducted in August and September. More than half of business leaders
surveyed were confident about the country's economy over the next year,
however, there were signs political uncertainty was leading firms to be more
cautious on future investments and increasing employment.
Monthly Economic Commentary: inflation returning
Growth of Scotland’s private sector slowed in October, as output growth
weakened and new business levels stagnated, according to the latest Bank of
Scotland PMI business survey. However, companies continued to increase
employment despite facing the sharpest increase in input costs since
September 2011 due to the fall in sterling. Scotland’s private sector grew
slightly for a second successive month, although at a slower rate than
September; this was the case for both manufacturing and services.
Higher prices and lower wage growth following the fall in sterling is
expected in Scotland, according to a report by accountants BDO. Their
inflation index is at its highest level in more than three years and their survey
output index, which indicates how businesses expect to perform in the next three
months, has also fallen as sterling weakness reduces business confidence. The
expected rise in inflation is due to increased prices of many imported goods.
Unemployment fell by 14,000 in the three months to September according
to the latest official figures. The unemployment rate fell to 4.7%, just below the
UK rate of 4.8%, down by 0.4 percentage points on the three months to June.
Employment also fell by 25,000 resulting in an employment rate of 73.6%
(below the UK rate of 74.5%). In the year to October, the claimant count
unemployment rate increased in 18 out of 32 local authority areas. The worst
affected areas were Aberdeen City, Aberdeenshire and Dundee.
Summary of Headline Indicators
Indicator
Scotland
Change
on year
UK
GDP growth (Q2
2016)
0.4%
0.5%
Manufactured
Export growth (Q2
2016)
-3.6%
0.05%
Employment rate
(Jul – Sept 2016)
73.6%
74.5%
Unemployment rate
(Jul – Sept 2016)
4.7%
4.8%
Change
on year
November 2016
Potential impacts on the economy of Brexit
The Office for National Statistics (ONS) assessment of the UK post-referendum
economy for September notes the picture is still emerging and will continue to
do so over coming months. Information so far generally covers short-term
indicators. Over the last month data have been more positive than expected
although the emerging consensus is perhaps that the negative impact might be
more likely to occur next year after Article 50 has been triggered and the
negotiations to leave begin. Currently, confidence is still positive albeit weak.
The Scottish Government’s State of the Economy report for October notes that
the EU referendum outcome represents a political shock to the Scottish, UK
and EU economies. It had an immediate impact in the financial markets and is
projected to have implications for Scotland’s future economic performance. The
erport also notes that there have been significant downward revisions to UK
GDP growth forecasts for 2017 linked to uncertainty.
The key factor influencing economic events in the short term is a heightened
level of uncertainty for households and businesses. For households, such
uncertainty can reduce confidence and lead to consumers deferring spending.
For businesses, uncertainty may delay investment and recruitment decisions.
Together, these elements can slow economic growth until greater certainty and
confidence about the economic outlook is restored.
Performance of SE Account Managed Companies
Scottish Enterprise regularly seeks feedback from Account Managed (AM)
companies on business performance. During September and October 2016,
530 companies were surveyed. When asked about the general economic
conditions for their sector in six months time, over half (53%) stated they were
unsure, a third thought it would be better and 12% thought it could be worse.
In terms of recent performance, almost 60% had increased turnover in the
previous six months, although a lower proportion reported growing profits
suggesting pressure on margins for some companies. Just over 40% of
companies had recruited more staff. Performance is broadly similar to levels
seen at the start of 2016.
Monthly Economic Commentary: inflation returning
% of responding businesses
In last six months, compared to same period a year ago, how has the
company performed? (Proportion of businesses)
70%
Implications for Scottish Enterprise
Trading conditions will continue to be challenging for Scottish businesses. The
Scottish economy is growing, but at a lower rate than the UK as a whole. Slow
global growth, the continuing effects of the slowdown in offshore oil & gas and
uncertainty about the UK’s future relationship with the EU remain significant
headwinds for the Scottish economy. The fall in sterling, although potentially
increasing the international competitiveness of exports, is increasing the costs
of imported goods and services. This may impact negatively on margins and on
household purchasing power.
60%
50%
40%
30%
20%
10%
0%
Turnover
Profitability
Increase
Same
Employment
Exports
Decrease
Looking ahead, a high proportion of companies are optimistic about turnover
and exporting prospects.
In the next six months, compared to the same period a year ago, how
does the company expect to perform? (Proportion of businesses)
% of responding businesses
November 2016
80%
70%
60%
50%
40%
30%
20%
10%
0%
Turnover
Profitability
Increase
Same
Employment
Decrease
Exports
So far, the economy has been quite resilient in the face of challenging external
economic conditions. Improving competitiveness, particularly through increased
productivity levels to compensate for higher input prices, will be a key factor for
Scottish firms to compete at home and overseas through a focus on innovation,
investment, entering new markets and developing higher workforce skills.
Strategy & Sectors
November 2016
_______________________________________________________
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 Jonathan Slow
([email protected]) or call 0141 228 2791.