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Scottish Economy Glasgow Caledonian University. Gary Gillespie 3rd March 2017 Part 1 -Overview of Economic Conditions: Key Points: • The economy has remained resilient despite more challenging internal and external conditions over the last 2 years. • Economic Growth has slowed below trend and relative to the UK reflecting specific sectoral issues in Scotland. • The aggregate labour market has remained resilient with high levels of employment and falling unemployment though against a backdrop of a changing labour market (increased churn and a changing composition). • The EU Exit vote has impacted on economic conditions (Sterling, Monetary & Fiscal policy) including expectations and uncertainty – the latter are expected to impact negatively on growth (via investment and inflation) in 2017 and 2018. • Outturn growth for Scotland for 2016 is forecast at around 1 per cent with a broadly similar outlook for 2017. (UK growth 2016 (1.8%) is forecast at 1.4 % in 2017.) • UK growth contingent on expectations and the impact of changing terms of trade relating to EU exit – potential impacts expected to materialise through 2017. • Scotland not immune to these impacts though there are signs of a potential easing of some of the structural/cyclical issues that have impacted Scotland (Oil and Gas etc.). Scottish Output and Labour Market Performance. Output Labour Market Sectoral Performance. Levels of Output Quarterly Growth Key Driver of Scotland’s Performance – Oil and Gas Sector. PACE Support (Apr-Oct 2016). By Sector By Local Authority Employers Individuals Mining & Quarrying 50 3296 Manufacturing 54 2734 Wholesale & Retail 58 1426 Construction 12 1026 Public Admin, Defence Education & Health 29 715 Accommodation & Food Services 13 244 Admin & Support Services 5 217 Finance & Insurance 7 169 Information & Communication 10 149 Professional, Scientific & Technical 4 89 Electricity, Gas, Steam & Air Con 4 51 Transportation & Storage 4 51 Other Services 4 26 Water Supply and Sewerage Waste 1 26 Arts, Entertainment & Recreation 3 16 Real Estate 1 7 259 10242 Total Aberdeen City Fife Glasgow City City of Edinburgh West Lothian Inverclyde South Lanarkshire Dundee City West Dunbartonshire Aberdeenshire Falkirk Dumfries & Galloway South Ayrshire North Lanarkshire Angus Perth & Kinross East Ayrshire North Ayrshire Highland Scottish Borders Stirling Midlothian Argyll & Bute Moray Shetland Islands Na h-Eileanan Siar East Dunbartonshire East Renfrewshire Clackmannanshire East Lothian Orkney Islands Renfrewshire No LA Associated Employers Individuals 52 16 30 11 9 6 14 5 4 14 5 8 9 11 7 2 7 4 8 5 3 2 3 2 3 3 1 1 2 12 3377 1042 768 615 612 454 389 345 326 303 301 246 190 178 161 148 138 128 82 80 80 76 55 14 13 11 10 6 5 89 Decomposition of Annual Growth Rates. Changes in the types of jobs. Employment Growth by Occupational Skill Level, Scotland Cumulative increase in employment since 2004 Cumulative Increase (thousands) 200 150 100 Low Skill 50 Med-Low Skill Med-High Skill High Skill 0 Total -50 -100 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Annual Population Survey, Jan-Dec, ONS Economic Trends Global Trends • Low oil prices. • Weak global growth. • Overcapacity in some industries (i.e. steel). • Economic imbalances remain. • Economic & political uncertainty. Scottish Trends • Oil price fall has impacted North Sea and wider supply chain. • Services growth has picked up (boosted by lower Energy prices). • Sharp Sterling depreciation impacting on sectors and feeding through to prices. Part 2 – Brexit and the Nature of the Shock. • • • • • • • • Political vote/change triggering an economic event. Raised the spectre of ‘Political Risk’ within UK (contrary to previous wisdom/expectations). Different to financial crisis…..this is largely UK specific. Immediate channel is through uncertainty……longer term trade, investment and public finances. Fall in Sterling reflects market view but also potentially helps with any adjustment. Quantifying impacts is difficult……expectations are influencing activity across a range of areas. Immediate challenge is in addressing expectations – economic response to date largely on Monetary side (Bank of England) relating to financial stability – also looser Fiscal stance following Autumn Statement However, political framing important for informing immediate and longer term expectations. Brexit – Summary of Short Term Impacts. Economic Shock Concerns What we know so far.. Reduced consumer sentiment – uncertainty over the economic outlook leading to consumers reducing or deferring spending. (Not manifested yet). Financial Markets • Value of Sterling - 18% lower against the dollar and 12% against the euro compared to pre-referendum levels. • FTSE 100 / 250 - following an immediate downward shock, have fully recovered to above pre-referendum levels. Scottish Growth Forecasts • Fraser of Allander Institute - growth revised down for 2016 to 1.0% (1.4% pre-ref), and for 2017 to 1.1% (1.9% pre-ref). • ITEM Club – growth revised down for 2016 to 0.7% (1.8% pre-ref), and for 2017 to 0.4% (1.8% pre-ref). Summary of Scottish Business Surveys • Output and employment indicators have remained broadly stable in the second half of 2016, though business confidence remains finely balanced with the lower value of Sterling boosting export orders but raising input costs. Consumer Sentiment • Scottish Consumer Sentiment Index – Sentiment turned negative for the first time in Q3 2016. Stimulus Packages • Bank of England – Liquidity support (£250bn), reduction of Bank Rate to 0.25%, additional £70bn QE. • Scottish Government – acceleration of £100m capital expenditure and business information support service. • SG Growth Scheme – Programme for Government Delayed investment – uncertainty on Britain’s future relationship with the EU delaying businesses investment and recruitment decisions. Rising costs – the fall in the value of Sterling will create inflation via imports. However, British exports will be relatively cheaper. (Inflation rising) Slower EU growth – uncertainty and lower trade/investment exacerbating existing economic challenges for fragile EU economies. May act as a drag on growth in the EU as a whole, which remains Scotland and the UK’s largest trading partner. Deterioration in the public finances - the above channels feed through to a slowdown in UK economic activity, reducing tax revenues and having a detrimental impact on the UK public finances. Scottish Consumer Sentiment Index. Composite Index Part 3 – Impact on Competitiveness/Terms of Trade. • The Brexit vote and implications essentially represent a potential Terms of Trade shock to the UK and Scotland. • As a small open economy, trade (and the flow of capital and labour) are important to Scotland. • The many uncertainties surrounding Brexit, such as the UK and Scotland’s future relationship with the EU, make it difficult to estimate future changes. • Most analysis to date had focussed on 3 Scenarios – EEA, FTA & WTO relating to trade (4 Freedoms) however there are potentially wider social and economic implications. • Scottish Government published Scotland’s Place in Europe (December 2016). • UK Government set out their position – January 2016 – 12 Principles for Negotiation. Existing arrangements……. Europe’s Trade, Immigration and Currency Agreements Brexit – Implications on Trade and Regulatory arrangements. Share of total UK trade covered by trade agreements Chart Source: VOX CEPR’s Policy Portal Data Source: ONS and EC DG Trade. Changing Structure of the Scottish Economy – Output Changing Structure of the Scottish Economy – Exports Scotland’s International Trade: Imports and Exports as a Percentage of GDP (2014). Source: OECD and Quarterly National Accounts Scotland Luxembourg not included Scotland’s International Trade: International and RUK exports by Sector (2014) Source: Export Statistics Scotland Overview/Summary. • The Scottish economy has remained resilient despite the external challenges of 2015 (specifically oil and gas) continuing into 2016. Growth has remained below trend but resillient alongside the labour market. • The EU referendum vote has materially shifted economic sentiment and expectations which has led to changes in economic conditions – main risks relate to potential changes in future market access for goods, services, capital and labour. • Countervailing Forces – Sterling depreciation, interest rate cuts and QE are boosting immediate economic activity and offset negative sentiment and uncertainty. Consumptions remains strong but may be impacted by future price rises. UK growth of around 1.9 per cent (Scotland 1.1%) expected for 2016 but growth projected to fall by around half in 2017 (1.0%). • Forward Look – The process of Article 50, negotiations and external events make the future outlook more uncertain at this time. • The economic outlook for Scotland is influenced by the same factors but with the additional challenges facing the Oil and Gas sector. Links to publications. • Scotland’s Economic Strategy: http://www.gov.scot/Topics/Economy/EconomicStrategy • Scotland’s Labour Market Strategy: http://www.gov.scot/Publications/2016/08/2505 • State of the Economy Report: http://www.gov.scot/Topics/Economy/state-economy/latestSofE • Scottish Economy Statistics (e.g. GDP, labour market, exports): http://www.gov.scot/Topics/Economy/Statistics • Scotland’s Place in Europe: http://www.gov.scot/Publications/2016/12/9234 UK Prime Minister’s Speech 17/01/17: https://www.gov.uk/government/speeches/the-governments-negotiating-objectivesfor-exiting-the-eu-pm-speech