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Economic Commentary – January 2014
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Monthly Economic Commentary
 Global economic recovery continues
 UK is one of the fastest growing G7 economies
 Scotland recovery continuing and strengthening
Global Trends
Business surveys show that global manufacturing output
increased at its fastest rate in almost three years in
December, led by the G7 developed nations with robust
expansions in the US, Japan, Germany, the UK and Italy
offsetting the ongoing contraction in France and a sharp
slowdown in Canada.
The US economy, the world's largest, is expected to gain
momentum in 2014. Five years on from the financial crisis,
and following a run of positive economic data, the US
central bank (the Fed) announced its decision to taper its
monthly asset buying from $85bn to $75bn a month
starting in January. The December manufacturing
business survey data reported rates of expansion in
production and new orders among the highest recorded in
the 22-year history of the survey, with companies
benefiting from both strengthening domestic market
conditions and new export orders.
In China, the world's second largest economy, business
survey data for December reported that output expanded
and new orders increased, although the rate of growth
eased from the previous month with the manufacturing
survey data recording a three-month low and new export
orders declining for the first time since August. Elsewhere
in Asia, aggressive monetary policy in Japan, the world's
third largest economy, is showing some signs of success
with the economy benefiting from the falling value of the
yen that has made exports more competitive.
Economic recovery continued in the eurozone at the end
of 2013. December business survey results showed that
output rose to the second highest level in the last two-anda-half years with manufacturing leading the recovery as
new orders and export orders increased. However,
whereas Ireland and Germany reported strong growth
rates, there was slower growth in Spain and Italy and
output in France declined.
The growing recovery in the UK, US, and Europe is good
news for Scottish firms as they are Scotland’s most
important trading partners.
UK Trends
The UK was among the fastest growing advanced
economies in Q3 2013 and is expected to grow strongly in
Q4. In December, the Office for Budget Responsibility
(OBR) doubled its growth forecast to 1.4% for 2013, and
2.4% for 2014. However, recent growth has been driven
almost entirely by consumer spending, with the Bank of
England (BoE) reporting a rise in un-secured lending to
consumers and a falling savings ratio. Windfall PPI
compensation payments by banks to a large number of
households has also been a factor driving consumer
spending. For a sustainable recovery, there needs to be a
shift towards more business investment and exports.
Business confidence weakened for the second successive
month in December according to the latest Business
Confidence Barometer, mainly due to lower optimism
among companies in the services sector. Nevertheless,
the quarterly average was consistent with strong economic
growth in Q4.
Reviving business confidence is not feeding through to
capital investment yet: business investment is still below
its pre-recession peak and was broadly flat over the year
to Q3 2013. However, recent surveys suggest that
business investment intentions are starting to improve. For
example, a survey by Lloyds Bank reported that increased
business confidence had lifted investment intentions to a
19-year high with more than a quarter of firms surveyed
expecting to increase capital expenditure over the coming
six months.
Low levels of investment may have contributed to falling
productivity in Q3 2013. On an output per hour basis, UK
labour productivity fell by 0.3%. Productivity fell by 1.2% in
manufacturing and 0.1% in the services sector as the
number of hours worked grew faster than output.
Business survey data suggest that the recovery was still
strong in the final quarter of 2013. According to the latest
CBI Industrial Trends Survey growth in the UK’s
manufacturing sector continued to strengthen. Order
books and output reached an 18-year high in December.
Export orders also rose considerably, reaching their
strongest level for 22 months, with the improvement mainly
driven by the chemicals and motor vehicles & transport
equipment sectors.
Purchasing Managers' Index survey results showed that
UK manufacturing activity growth was among the highest
in the 22-year survey history in December. Companies
benefited from strengthening domestic market conditions
as well as a solid bounce in incoming new export orders.
Exports to destinations such as Brazil, China, Ireland,
Russia and the USA all increased.
Reflecting the business surveys, official employment
statistics in recent months have recorded the fastest rates
of job creation since the late 1990s. Unemployment fell by
0.3 percentage points in the three months to October to
7.4% (and the level of unemployment was the lowest since
2009). The number of people in work grew by 250,000
over the quarter (the biggest quarterly increase for more
than four years) and is up by almost half a million over the
year.
Excluding bonuses, pay grew by 0.8% compared with a
year earlier, but this is still well below the rate of inflation,
currently running at 2.1%, meaning that people's earnings
are still falling in real terms. However, as the rate of
inflation is fairly low most commentators believe that
interest rates are unlikely to increase until the end of 2015.
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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.
Economic Commentary – January 2014
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ITEM Club GVA Growth (%)
2014
2015
2016
Scotland
1.7
2.0
1.8
UK
2.4
2.6
2.5
HMRC trade statistics for the year to September 2013,
comparing the latest four quarters with the previous four
quarters, show that overseas exports from Scotland rose
in value by 3.8% (the largest increase among the four UK
countries). While exports to Belgium increased the most,
non-EU partner countries continued to dominate Scottish
exports (accounting for more than 60% of Scotland’s total
exports).
Business survey data suggests that the Scottish economy
is continuing to recover with business confidence
increasing. The Federation of Small Businesses reported
that confidence among small businesses in Scotland was
positive for the third consecutive quarter in Q4, at a similar
level as the UK as a whole. Companies’ financial
performance also improved over the quarter with
businesses expecting to increase capital investment
spending over the coming year.
Expectations are high for the recovery to continue into
2014 according to the latest Bank of Scotland Business
Monitor. In the three months ending November 2013 more
than a third of firms surveyed reported an increase in
turnover and more than a third expected turnover to
increase over the next six months. Although export activity
fell compared to the previous quarter and compared to the
same quarter in 2012, expectations for future export
activity were high.
Scotland continues to have the highest employment and
the lowest unemployment and inactivity rates of all the UK
nations. The Scottish unemployment rate was 7.1% (a fall
of 0.3 percentage points) in the three months to October,
lower than the UK rate of 7.4%. The number of people in
employment rose to 2,546,000, which means 83,000 more
people are in work than the same period last year.
Performance of SE Account Managed (AM) Companies
Feedback from 200 AM companies surveyed between
October and December was positive, with a high
proportion of companies reporting increases in turnover,
profitability, employment and exports. The proportion of
companies reporting profit and employment growth
continues to be lower than those reporting increased
turnover, which suggests a continued squeeze on profit
margins and improving labour productivity.
AM Companies Performance over the Past Six Months
Q4 2013
90
Proportion of AM Companies (%)
Ernst & Young Scottish ITEM Club’s latest analysis show
that Scotland is enjoying its most sustained period of
economic growth in three years, underpinned by increased
consumer spending and households dipping into their
savings. E&Y highlights disappointing data for overseas
trade and investment. Overseas export values were
stagnant in the first half of 2013, affected by recession in
the eurozone. Shrinking investment spending was a drag
on GDP growth in the first half of 2013. Nevertheless,
survey data points to sustained private sector recovery
and the Scottish economy is expected to grow over the
next three years. Notably, Scottish growth is forecast to lag
the UK as a whole.
The Bank of Scotland Report on Jobs reported that
permanent appointments rose at the fastest rate in the
survey’s history in December, alongside an increase in
temporary placements. Demand for staff improved across
all eight industry sectors the survey covers.
70
Base = 170
Base = 168
Base = 170
Base = 98
50
30
10
-10
-30
Turnover
Profitability
Increased
Employment
Same
Exports
Decreased
Looking ahead to the next six months, companies are
optimistic about trading conditions. Around three quarters
of the companies surveyed expect an increase in turnover
and exports.
AM Companies Performance over the Next Six Months
Q4 2013
90
Proportion of AM Companies (%)
Scottish Trends
The latest Scottish Government State of the Economy
report highlighted growing output over the year with growth
forecast to be stronger in 2014. Domestic consumption
has been the key driver of the recovery, but the report
notes that sustained growth into the medium term will
depend on increased competitiveness, private sector
investment and external trade contributing more to the
overall balance of growth.
70
Base = 170
Base = 168
Base = 170
Base = 98
50
30
10
-10
-30
Turnover
Profitability
Increased
Employment
Same
Exports
Decreased
Strategy & Economics, January 2014
____________________________________________________________________________________
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.