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Monthly Economic Commentary: Economic Growth Expectations Downgraded
Global Trends
The OECD downgrades global growth forecasts. The OECD has warned
that growth prospects have ‘flat-lined’ and that global growth in 2016 is likely to
be the same as in 2015. Recent data have pointed to slower growth in many
major economies, with trade and investment weak and demand sluggish
despite the boost from the low oil price and low interest rates. The OECD now
expects global growth to be 3.0% in 2016 and 3.3% in 2017.
OECD GDP Growth Forecasts (%)
2015
Global
3.0
United States
2.4
Euro Area
1.5
China
6.9
Japan
0.4
United Kingdom
2.2
2016
3.0
2.0
1.4
6.5
0.8
2.1
2017
3.3
2.2
1.7
6.2
0.6
2.0
Source: OECD Economic Outlook, February 2016
In the US, the world’s largest economy, GDP grew by 1% (annualised rate)
in Q4 2015. Consumer spending increased modestly; however, net trade and
business investment were weak. The strong dollar, slowing global growth and
reduced investment in the oil & gas sector continue to constrain activity. The US
is Scotland’s single biggest export market, accounting for 16% of all overseas
sales.
More recent US business surveys indicate expansion in the service
sector, but at a slightly slower pace than the previous month; while in the
manufacturing sector output fell for the fifth consecutive month. The decline in
manufacturing activity is largely due to slowing global demand and a strong
dollar making US goods more expensive to foreign buyers. In the US labour
market, employment increased by 242,000 in February. The US unemployment
rate was unchanged at 4.9% - an eight year low.
Recent eurozone business survey data suggest a loss of growth
momentum. Surveys from both manufacturing and service sectors indicate a
slowdown in private sector activity. Rates of output growth slowed in both
sectors, while new orders rose at a weaker pace. Looking across the zone,
growth eased in Germany, Italy and Spain, while France fell back into
contraction for the first time in thirteen months. Employment rose for the
March 2016
sixteenth consecutive month; however, the rate of growth eased to a five month
low reflecting slower growth trends in both output and new orders. The
unemployment rate across the zone was 10.3% in January, the lowest rate
since August 2011 but still high compared to other advanced nations. The
eurozone is Scotland’s main overseas trading partner, accounting for 42% of all
Scottish exports, so any weakness in growth is likely to affect demand for
Scottish good and services.
The European Central Bank (ECB) announced further economic stimulus
measures. The ECB also cut economic growth forecasts, reflecting the
weakened growth prospects for the global economy. The Bank now expects
growth to be 1.4% in 2016; 1.7% in 2017; and 1.8% in 2018. The inflation rate
for February fell sharply to -0.2% (down from 0.3% in January). In a bid to
boost the economy, the Bank cut interest rates (to minus 0.4%) and increased
its programme of quantitative easing (QE) from €60 billion per month to €80
billion.
China’s economic growth target for 2016 is reduced to between 6.5%-7%.
In 2015 China grew by 6.9%, below its target of 7%, and the slowest pace of
expansion in 25 years. Business survey data for February indicated an
intensified downturn in China’s manufacturing sector. There were further
declines in output and new orders, which in turn contributed to the fastest
reduction in staffing levels since January 2009. China’s exports fell sharply (by
25.4% in February), the biggest drop in almost seven years, resulting in
industrial production posting its weakest pace of growth since the financial
crisis.
Japan, the world’s third largest economy, contracts in final three months
of 2015. GDP in Japan fell by 1.1% (annualised rate) in Q4 due to weaker
domestic demand, slower investment in housing and the slowdown in China,
one of Japan’s main export markets. Japan’s exports fell for the fourth
consecutive month in January, declining by 12.9% compared to a year earlier.
Last month the Bank of Japan (BOJ) introduced a negative interest rate of
minus 0.1% in an attempt to increase spending and investment, which in turn
should help to boost economic growth.
Monthly Economic Commentary: Economic Growth Expectations Downgraded
UK Trends
The Office for Budget Responsibility (OBR) downgrades UK growth
forecasts. One of the most significant changes to the OBR’s forecasts was the
downgrade in the outlook for productivity growth, which had an overall impact
on GDP forecasts. The OBR now expects UK growth for 2016 to be 2% (down
from its November forecast of 2.4%) and 2.2% in both 2017 and 2018. The
OBR said that since its November forecast, economic developments continued
to ‘disappoint’ and that the outlook for the economy is ‘materially weaker’.
In the UK, revised GDP estimates indicate the economy grew by 0.5% in
Q4 2015, up from the 0.4% growth recorded in the previous quarter. For 2015
as a whole GDP growth was 2.2%, down from 2.9% in 2014. Growth was
driven by the service sector (+0.7%) with manufacturing output flat following two
consecutive quarterly declines. Construction activity contracted 0.1% following
a decline of 1.9% in Q3.
UK business surveys for February indicate a notable loss of momentum in
activity. UK service sector activity expanded at the weakest pace in nearly
three years due to a slower increase in the volume of new business, with firms
reporting that rising levels of global uncertainty had led to delays in new orders
being placed.
UK manufacturing growth fell to a three year low. Output growth slowed
sharply in February following a slowdown in new orders. In the labour market,
job losses were registered for the second consecutive month. New export
orders also declined for the second month running, with companies reporting
weaker orders from Europe, the US, Brazil and Russia.
Construction output growth hits a 10-month low. Survey data for February
signalled a loss of growth momentum across the UK construction sector.
Output, new orders and employment all expanded but at a slower rate
compared to the previous month. The worst performing sub sector was
residential building, with housing recording the slowest rise in activity since
June 2013. There was also a slowing of commercial building work. Meanwhile,
civil engineering bucked the overall trend, with activity rising at the fastest rate
in five months, with firms reporting growth in infrastructure projects.
March 2016
UK unemployment rate remains at a decade low. In the three months to
January, UK unemployment decreased by 28,000 on the previous quarter to
reach 1.68 million. The ILO unemployment rate remains at a ten year low of
5.1%. Employment stood at 31.4 million, an increase of 116,000 on the
previous quarter. The employment rate is 74.1%, the joint highest since records
began in 1971.
Scottish Trends
Forecasts for Scottish economy are revised down for 2016 and 2017. The
Fraser of Allander Institute has cut its growth forecast for this year due to
slowing wage growth, weakening investment expenditure, the negative impact
of the low oil price on the oil & gas sector, and a weaker outlook for export
markets over the medium term. The Institute is now predicting growth of to be
1.9% in 2016, down from an earlier prediction of 2.2%. The forecast for 2017
was also revised down to 2.2% (down 0.3 percentage points).
Scottish private sector output contracts. The latest Bank of Scotland PMI
business survey indicates that business activity declined in February for the first
time in three months, mainly driven by a fall in new orders. Sector data show
that the slowdown in activity was broad-based, with manufacturing output
declining for the fourth consecutive month and the service sector recording its
first decline since September last year. Volumes of new business stagnated in
the service sector, while manufacturers reported further falls in new orders from
both domestic and overseas markets.
Employment levels continued to fall in service sector companies; however,
manufacturing employment stabilised ending a four-month sequence of job
losses. Overall, the Bank states that the Scottish economy is being negatively
impacted by the downturn in the Aberdeen region, the oil and gas sector, and
weak export orders.
Scottish small business confidence declines in first quarter of 2016. The
latest quarterly report from the Federation of Small Businesses (FSB) shows
that its business confidence index has turned negative for the first time in three
years; more firms expect a deterioration in business conditions than an
improvement over the next three months. FSB members also reported a fall in
profits and employment over the past three months, with the number of firms
Monthly Economic Commentary: Economic Growth Expectations Downgraded
March 2016
expressing concerns about the Scottish economy reaching a record high.
Despite the drop in business confidence, investment intentions by small
businesses in Scotland remain steady, supported by a continuing easing of
credit conditions.
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.
Scottish unemployment rose by 16,000 in the three months to January
2016. The ILO unemployment rate now stands at 6.1% (compared to the UK
rate of 5.1%). The total number of people in employment increased by 17,000
to reach 2.63 million. The Scottish employment rate is 74.5%, marginally higher
than the UK rate of 74.1%.
Strategy & Sectors
March 2016
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Summary of Scottish Indicators
Indicator
Scotland
Change
on year
UK
GDP growth
1.7%
2.1%
Manufactured Export
growth
2.4%
3.9%
Employment rate
74.5%
74.1%
Unemployment rate
6.1%
5.1%
Change
on year
Implications for Scottish Enterprise
The latest data suggest that growth in the Scottish economy has weakened.
Growth forecasts have been revised down for 2016 and 2017 due to global
factors. This is in line with the economy globally but the impact on Scotland
appears to be more significant than on the UK as a whole.
The Scottish economy faces a number of headwinds: in particular, the negative
effects from the ongoing low oil prices, particularly on employment and
investment in the oil & gas sector and its supply chain, and a weaker outlook for
exporters with slowing global growth and an increase in economic uncertainty.
Ongoing trading conditions will, therefore, remain challenging for Scottish
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.