Download Monthly Economic Commentary: slower Chinese growth starting to

Monthly Economic Commentary: slower Chinese growth starting to impact on growth
Global Trends
Global growth will slow to the lowest rate since the financial crisis. The
National Institute of Economic and Social Research (NIESR) cut its 2015 global
forecast to 3.0% - the slowest rate since the financial crisis, with 3.5% expected
in 2016. NIESR has downgraded its growth forecast for the US economy, the
eurozone and many emerging market economies. Its growth forecast for the UK
is unchanged at 2.5%. NIESR identifies two key reasons for the downgrades:
the effects of the Greek crisis and the slowdown in the Chinese economy.
In the US, the world’s largest economy, GDP growth for Q2 2015 was 2.3%
(annualised rate). The main driver of growth was an increase in consumer
spending, with household incomes benefiting from low inflation, falling oil prices
and an improving labour market. There was also an upturn in exports despite
the strong dollar. Strong growth in the US is good news for Scottish exporters
as the US accounts for 15% of our exports.
The Federal Reserve has said the US economy is on a ‘stronger footing’
with economic activity expanding moderately over the last few months.
The US central bank has kept interest rates at close to zero since December
2008 and did not provide a clear indication of when rates would rise. However,
analysts expect that the recent positive data releases for the US economy could
result in the Fed increasing the interest rate in September.
More recent US business surveys were also generally positive. The service
sector continued to expand, although growth in manufacturing slowed modestly.
In the US labour market employment increased by 215,000 in July, while
employment gains for May and June were also revised upwards. The US
unemployment rate remains at a seven-year low of 5.3%.
Eurozone GDP growth was 0.3% in Q2 2015, slightly weaker than Q1’s 0.4%.
Looking across the zone, Germany grew by 0.4%, Italy’s growth slowed to
0.2%, while in France growth was 0.0% in the second quarter. Finland is now
officially in recession. However, preliminary figures for Greece suggest better
than expected growth of 0.8% in the second quarter.
Inflation in the eurozone remained steady at 0.2% in July a result of falling
energy prices offsetting price rises in industrial goods. The eurozone emerged
August 2015
from four months of deflation in April, but the rate is still below the European’s
Central Banks (ECB) target of 2%. The eurozone unemployment rate also
remained stable for the third month in a row in June, at 11.1%.
More recent eurozone business survey data indicate a slight easing of
growth in July. However, growth remains close to June’s four-year high. Both
manufacturing and services saw an expansion of activity, with the service
sector slightly faster than manufacturing. Looking across the zone, growth
accelerated in Spain, remained solid in Germany, but slowed in both France
and Italy. Employment rose for the ninth consecutive month, with increases
recorded in Germany, Italy and Spain. The data suggest that tensions over the
Greek crisis did not significantly affect business activity in July.
The eurozone is Scotland’s main overseas trading partner, so increased
economic growth should help to boost demand for Scottish good and services.
However, this may be offset by the strong pound which will make Scottish
exports more expensive in the eurozone. The value of Sterling has increased by
more than 10% against the euro since the beginning of the year.
Growth in China, the world’s second largest economy, was 7% (y/y) in Q2
2015. The economy is growing at its slowest rate in six year and recent
economic data suggest it could be headed for a prolonged slowdown – although
still nowhere near a recession. Business survey data for July indicate an
intensified downturn in China’s manufacturing sector at the start of the third
quarter, with further falls in both total new work and export orders. China’s
exports fell by 8.3% in July, the biggest drop in four months. The fall in exports
was largely due to a drop in exports to the US - China’s biggest export market and depressed demand from Europe. As a result, China’s central bank has
devalued the national currency, the Yuan, by 1.9%, which is now at its lowest
rate against the dollar in almost three years. The weaker Yuan will increase the
competitiveness of China’s exports in international markets, but make Scottish
exports to China less competitive.
The Japanese economy, the world’s third largest, is expected to contract
in Q2, although official data are not released until the end of the month. Recent
data indicate a fall in consumer spending, the key component of GDP growth.
Moreover, the slowdown in China is also expected to effect adversely Japanese
exports and industrial production as much of this is sold to China for
manufacturing activity.
Monthly Economic Commentary: slower Chinese growth starting to impact on growth
UK Trends
In the UK, the economy grew by 0.7% in Q2 2015, compared with growth of
0.4% in Q1. The economy has now grown for ten consecutive quarters. Over
Q2, service sector GDP expanded by 0.7%, construction output remained flat
and manufacturing output experienced its first fall in two years, with output
dropping 0.3%. The biggest contribution to overall growth was from the
services sector and the strongest growth in mining and quarrying, which
includes oil and gas extraction, since 1989 (+7.8%). Despite the falling oil price,
the increase is likely to be down to recent tax cuts, announced in the March
budget, designed to support the sector.
In the Bank of England’s (BoE) latest inflation report, the UK’s growth
forecast was revised upwards, with the Bank now expecting GDP to rise
2.8% in 2015. Growth for 2016 is expected to moderate to 2.6%, unchanged
from its previous forecast. The Bank also kept UK interest rates at 0.5% for the
78th consecutive month. However, the Bank suggested that the timing for a rate
increase is drawing closer.
UK business surveys for July indicate the economy has slowed as we
move in to the second half of 2015. The service sector continues to be the
main driver of economic growth. Although the service sector remains strong
there was a slight dip in growth in July. This links to some weakness in the
manufacturing sector and a renewed slowing in construction sector activity.
UK manufacturing activity picked up in July, after a 26 month low in June,
however growth remains ‘near-stagnant’. New orders slowed to the lowest
level since Sept 2014, while exports contracted for the fourth consecutive
month. Overall, the sector is still reliant on the domestic market to drive
demand. The sterling-euro exchange rate is affecting the competitiveness of
UK exports into that market.
UK construction output growth slows. Survey data for July signalled a loss
of momentum across the UK construction sector, with both business activity
and new work expanding at slower rates compared to the previous month.
Across the sector, residential building remained the fastest growing area, but
this has lost momentum since June. Meanwhile commercial projects bucked
the overall slowdown, with activity rising at the fastest rate since March.
August 2015
In the labour market, UK unemployment increased by 25,000 on the
previous quarter, to reach 1.85 million. The ILO unemployment rate now
stands at 5.6%. Employment stood at 31.3 million in the three months to June
2015, a decrease of 63,000 on the previous quarter. The employment rate now
stands at 73.5%.
Scottish Trends
The latest Bank of Scotland PMI business survey indicates that private
sector output is increasing. Output growth accelerated at its strongest pace
in 2015 so far in July. Sector data showed that activity grew in both
manufacturing and services. Growth was primarily driven by the manufacturing
sector, with output returning to growth after three months of contraction. New
orders rose in both sectors and the pace of decline in new exports slowed.
Employment levels fell for the first time in nearly four years, largely a result of
job shedding in the service sector. Overall the Scottish economy continued its
recovery from the slowdown in the first quarter of the year.
Scottish international manufactured exports grew in the first quarter of
2015. The Scottish Index of Manufactured Exports showed that the volume of
manufactured overseas sales increased by 2.1% in Q1 2015. However,
volumes are still 5.3 percentage points below their 2008 pre-recession peak.
Over the quarter the largest contributors to growth were from Drink (+6.1%),
Non-Metallic, Other Manufacturing & Repair (+5.4) and Refined Petroleum,
Chemical & Pharmaceutical Products (+0.6%) - which together account for
around two thirds of international manufactured exports. On an annual basis
(comparing the most recent four quarter to the previous four) the volume of
manufactured exports grew by 2.7% (same as UK).
The Scottish Chambers of Commerce Business Survey suggests
continued growth in Q2 2015. The survey reported strong performance in
both the manufacturing and construction sectors, with trends in retail and
tourism industries fairly typical compared with seasonal averages. However,
financial & business services reported its weakest quarter since Q1 2014.
Looking further ahead, expectations for sales revenues and profits across all
sectors of the economy were upbeat.
August 2015
Monthly Economic Commentary: slower Chinese growth starting to impact on growth
Scottish unemployment fell by 13,000 in the three months to June 2015.
The ILO unemployment rate now stands at 5.6% (equal to the UK rate).
However, there was also a slight fall in the number of people in employment
and a small rise in the number of economically inactive people. The total
number of people in employment fell by 11,000, with total employment now at
2.61 million. While the economically inactive increased by 24,000. The Scottish
employment rate is 74.1%, higher than the UK rate of 73.4%. Youth
employment in Scotland has reached a ten year high, growing by 20,000 over
the quarter to reach 363,000. Youth unemployment also fell by 7,000, with the
youth unemployment rate now 14%.
Performance of SE Account Managed Companies
Turnover Performance
January 2015 - June 2015
(over last six months)
100%
80%
60%
40%
20%
0%
Financial & Technology
Business
&
Services Engineering
Scottish Enterprise regularly seeks feedback from account managed companies
on business performance. Over the period January 2015 to June 2015, over
780 companies were surveyed. Overall, a majority reported increased turnover
(64% of companies) over the six months prior to survey. Looking across the
growth sectors, financial & business services, technology & engineering and
food & drink all had a higher proportion of companies reporting increased
turnover than the AM company average.
Overall, fewer firms achieved increases in profitability (55% of companies) than
turnover (64%), which suggests that companies may be experiencing pressure
on profit margins. Sectors where companies were most likely to achieve
profitability growth were financial and business services, food & drink and life
sciences.
Food &
Drink
Increased
AM
Company
Average
Creative
Industries
Decreased
Life
Sciences
Energy
Tourism
Energy
Creative
Industries
Same
Profitability Performance
January 2015 - June 2015
(over last six months)
100%
80%
60%
40%
20%
0%
Financial &
Business
Services
Food &
Drink
Life
Sciences
Increased
AM
Company
Average
Tourism
Decreased
Technology
&
Engineering
Same
Monthly Economic Commentary: slower Chinese growth starting to impact on growth
Implications for Scottish Enterprise
The latest data suggest that growth in the Scottish economy continued in Q2
2015, recovering from the slowdown in first quarter of the year. Moderate
growth is expected for the rest of the year, with the economy still facing a
number of headwinds: in particular, the negative effects from ongoing lower oil
prices on employment and investment and also weaker export growth
especially to the eurozone – Scotland’s main overseas trading partner. The
value of sterling has been rising against the euro for several months now,
making Scottish exports more expensive in euro markets. Ongoing trading
conditions will, therefore, remain challenging for Scottish businesses,
particularly for manufacturing firms, making it more difficult for them to break
into new markets or become first time exporters. Improving competitiveness will
be a key factor for our firms to compete in the global economy, which can be
achieved by increasing productivity, investment and innovation
Strategy & Sectors
August 2015
_______________________________________________________
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.
August 2015