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Monthly Economic Commentary
June 2016
Global Trends
investment (a proxy for construction and infrastructure spending) growth was
the slowest since 2000 as private companies refrained from spending.
The global economy is stuck in a low-growth trap according to the OECD’s
latest assessment. Growth is flat in advanced economies and has slowed in
many emerging ones. Among the major advanced economies, a moderate
recovery is expected to continue in the United States and improve slowly in the
euro area. Among emerging economies growth is expected to drift lower in
China as its economy continues to rebalance.
Japan’s economy, the world’s third largest, grew at an annualised rate of
1.7% in the first quarter of 2016, exceeding expectations and suggesting the
economy is managing to shake-off the effects of the slowdown in China and a
strong yen. Next April’s planned rise in consumption tax has been postponed
until October 2019 which should deliver a further boost to the economy.
OECD GDP Growth Forecasts (%)
2015
World
3.0
United States
2.4
Euro Area
1.6
China
6.9
Japan
0.6
United Kingdom
2.3
Growth in the eurozone remained subdued in May. Business Survey results
show that growth so far in the second quarter is just below first quarter
performance. As the bloc is Scotland’s largest export market, subdued growth
means that trading conditions are likely to remain challenging for Scottish
exporters. There are signs of improvement in France and Germany (the two
biggest eurozone economies), mainly led by their service sectors;
manufacturing continued to struggle. Growth slowed in Spain and Italy. The
OECD expects sustained monetary stimulus and low oil prices will support
domestic demand, but the slowdown in emerging markets will weigh on exports.
2016
3.0
1.8
1.6
6.5
0.7
1.7
2017
3.3
2.2
1.7
6.2
0.4
2.0
Source: OECD Global Economic Outlook, June 2016
Manufacturing activity grew for the third consecutive month in the US (the
world’s largest economy) in May. Service sector activity grew for the 76th
consecutive month, but at a slower pace than in April. Overall, the economy
grew for the 84th consecutive month. Jobs growth figures were disappointing,
with only 38,000 created in May. Initial job estimates for March and April were
also revised downwards. Nevertheless, the OECD believes that output remains
on a moderate growth trajectory sustained by mutually-reinforcing gains in
employment, income and household spending. American household spending
increased at its highest rate in over six years in April, confirming strong
consumer confidence, which is good news for Scottish exporters as the US is
one of our main international export markets.
Growth in business activity weakened for the second month in a row in
China (the world’s second largest economy) in May. The latest business survey
results show service sector activity expanded at a slower rate than in April (the
weakest since February) and manufacturers reported a slight fall in production
for the second consecutive month. Exports fell further in May (and are 4.1%
lower than this time last year) as global demand remained weak. Rising import
volumes suggest that domestic demand momentum held up, but fixed asset
UK Trends
UK growth expectations for 2016 were revised down to 2% (previously
2.2%) by the Bank of England in May. Weak productivity growth and a weaker
than expected outlook for household consumption were the main factors cited
for the revision. However, the Bank’s forecast for 2017 was unchanged at 2.3%.
Total production output is estimated to have increased by 1.6% over the
year to April 2016, according to official statistics. The biggest contribution
came from manufacturing (the largest component of the production sector),
which increased by 0.8%. The remaining three sub sectors, mining & quarrying,
electricity, gas, steam & air conditioning and water & waste management also
grew (by 0.3%, 6.2% and 5.5% respectively). Within manufacturing, basic
pharmaceutical products & pharmaceutical preparations increased by 12.5%,
the largest rise since April 2009.
More recent UK manufacturing data suggests subdued, though still
growing, activity, according to business survey results in May. New business
and output increased in the consumer goods sector but continued to decline in
the investment goods sector. Orders are weak and come mainly from domestic
demand for consumer and intermediate goods. New export orders fell for the
Monthly Economic Commentary
fifth consecutive month, linked to softer global economic growth and ongoing
market uncertainties. The service sector continued to expand in May, although
the rate of growth was one of the weakest over the past three years.
Employment increased for the forty-first consecutive month, but the rate of
increase was the lowest since August 2013, largely reflecting lacklustre new
business orders.
Business confidence fell to a three-month low in May according to the
Lloyds Business Barometer survey. This was the second consecutive monthly
fall, suggesting that economic growth may slow further in Q2. Economic
optimism also declined slightly and the net balance of firms expecting to
increase their staffing levels fell, with less than a third of firms anticipating an
increase over the next year. Larger firms and firms in the industrial sector were
more confident about their business and economic prospects, and the highest
level of confidence was in larger companies with annual turnover over £20m.
The UK’s trade in goods deficit narrowed between March and April.
Contradicting business survey results that have been reporting falling exports
over the last few months, official data show that exports of goods rose by 9.1%
(+£2.2bn), the highest rate increase since January 2003. Imports of goods rose
by £2bn over the same period. Over the three months to April exports of goods
increased by 6.4%, the largest 3 month on 3 month increase since January
2011.
The UK unemployment rate fell to 5%, the lowest since October 2005, in
the three months to April according to the latest figures from the Office for
National Statistics (ONS). The employment rate remains at a record high of
74.2%. Youth unemployment (16 to 24 year olds) was 13.6%, down from 16.0%
a year earlier and at its lowest rate since 2005. Over the year, there are
304,000 more people in full-time and 157,000 more in part-time employment.
Scottish Trends
Scotland’s economy is still growing although the rate of growth slowed
during 2015 and was significantly below the growth rate of 2014, according to
the latest Scottish Government’s State of the Economy report. This reflects the
impact of a number of external factors, including lower global commodity prices,
which impacted on the oil and gas and related sectors, more difficult trading
conditions for exporters (as sterling strengthened), and weaker global markets.
June 2016
Scotland’s economic growth in 2016 is predicted to be the slowest since
2012. Ernst & Young Scottish ITEM Club has downgraded its GDP growth
forecast for 2016 to 1.2% (0.6 percentage points lower than they forecast six
months ago). Scotland now faces a third consecutive year of slowing GDP
growth, partly as a consequence of the oil price slump but also
underperformance in the service sector, with many areas of services performing
poorly compared to the UK. However, the negative impact of the oil-price fall on
growth is expected to fade in 2017 and their growth forecast for 2017 is now 2%
(0.2 percentage points higher than forecast six months ago).
Fraser of Allander Institute revised its growth forecasts for Scotland down
for 2016, 2017 and 2018, to 1.4%, 1.9% and 2% respectively. Output and jobs
growth have both weakened since their last forecast, and labour market data
show a significant deterioration in performance as job losses associated with
the falling oil price and deteriorating export performance are both impacting on
companies. Domestic and overseas demand for Scottish goods and services is
faltering, and growth is increasingly dependent on weakened domestic demand.
Scotland’s engineering sector is stagnating as a result of the effects of the
drop in oil prices coupled with global economic weakness, according to Scottish
Engineering’s Q2 review. Order intakes have been negative for four
consecutive quarters and output volume is the same as Q1. Exports orders are
still negative, as are export predictions for the next quarter.
Scottish private sector businesses reported a higher volume of new
business in May according to the latest Bank of Scotland PMI report, although
the headline figure slipped slightly into negative territory. The rise in new
business was largely driven by manufacturing, which reported the largest
increase for 21 months, but other areas of the economy are still struggling as
backlogs decline and job shedding persists. A number of companies linked the
slowdown to the ongoing downturn in the oil & gas sector.
The value of exports of goods from Scotland fell by 11.4% to £17.23 bn
over the year to March 2016, and volumes declined for four consecutive
quarters. HMRC statistics show that Scotland’s exports continue to be
dominated Machinery & Transport Equipment, which declined by -9.9%, and
Drink, which fell by -3.3%. Scotland’s exports to the EU decreased by 18%
during the last year, while exports to non-EU countries fell by 6.2%.
Monthly Economic Commentary
June 2016
Unemployment in Scotland fell by 11,000 in the three months to April,
resulting in a 0.3 percentage point drop in the unemployment rate to 5.8%
(compared to 5% in the UK). However, employment also fell by 48,000 and the
employment rate is now 73.2% (below the UK average of 74.2%). The number
of working age economically inactive people (not in work and neither seeking
nor available to work) increased by 54,000 over the quarter (26,000 men
(+9.3%) and 28,000 women (+6.5%)). In the year to December 2015, the group
with biggest increase in the number of economically inactive was 25-49 year old
men (up by 13,000).
Summary of Headline Indicators
Indicator
Scotland
Change
on year
UK
GDP growth (Q4
2015)
0.9%
2.1%
Manufactured Export
growth (Q4 2015)
0.6%
5.2%
Employment rate
(Feb – April 2016)
73.2%
74.2%
Unemployment rate
(Feb – April 2016)
5.8%
=
Change
on year
5.0%
Performance of SE Account Managed Companies
Scottish Enterprise regularly seeks feedback from Account Managed (AM)
companies on business performance. Over the period October 2015 to March
2016, over 450 companies were surveyed. The majority of companies surveyed
(65%) were overseas exporters. 50% of exporting firms said that export levels
had increased over the previous six months.
65% of exporting firms stated their most important export market was Europe,
followed by North America (20%), with almost 85% and 60% of exporting firms
actively exporting to Europe and North America respectively. Compared to
2015, there have been decreases in the proportion of firms reporting a rise in
sales in every market (although this is very slight in the Asian market).
Monthly Economic Commentary
Implications for Scottish Enterprise
Scotland’s economic growth is slowing, buffeted by external factors such as the
weak oil price and challenging global trade environment. There is slow growth
in key export areas, reduced activity in important industrial sectors and job
losses affecting household incomes, all affecting overseas and domestic
demand and resulting in falling business optimism and confidence. Ongoing
trading conditions will remain challenging for Scottish businesses. Improving
competitiveness, particularly through increased productivity levels, 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
June 2016
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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.
June 2016