Download Monthly Economic Commentary: Slower growth approaching

Monthly Economic Commentary: Slower growth approaching
Global Trends
The IMF downgrades global growth forecasts. The IMF is predicting
moderate growth for this year; however, the recovery remains fragile and, for
some economies, also uncertain and volatile. In the IMF’s latest assessment
global growth for 2015 has been downgraded to 3.1% in 2015 and 3.6% in 2016
(down from 3.3% and 3.8% respectively), primarily due to slower growth in
emerging markets offsetting improved performance in advance economies.
IMF GDP Growth Forecast (%)
Global
United States
Euro Area
China
Japan
United Kingdom
2015
3.1
2.6
1.5
6.8
0.6
2.5
2016
3.6
2.8
1.6
6.3
1.0
2.2
Source: IMF World Economic Outlook, October 2015
In the US, the world’s largest economy, GDP growth for Q2 2015 was
revised upwards to 3.9% (annualised rate). The upward revision was mainly
driven by stronger consumer spending and increased business investment in
commercial and residential construction.
The Federal Reserve has said the US economy remains ‘on track’ for an
interest rate rise this year. The US central bank kept interest rates on hold in
September due to concerns over global economic growth. Interest rates have
been close to zero since December 2008. Many analysts expected a rate rise
in September; however, it is now expected that this will take place in December.
More recent US business surveys indicate continued growth but at a
slower pace. Manufacturing growth slowed to its lowest level in more than two
years in September, as weaker overseas demand and a strong dollar continued
to put pressure on the sector. The service sector performed better but also
slowed to a more moderate pace of growth. US labour market data indicate
slower job creation, with employment increasing by a modest 142,000 jobs in
September (compared to an average of 230,000 per month over the previous
year). The number of jobs created in July and August was also revised down.
The US unemployment rate, however, remains at 5.1%.
October 2015
Recent eurozone business survey data suggests continued improvement
in September. There were solid gains in both output and new orders; however
the pace of expansion weakened to a four month low. Both the manufacturing
and service sectors saw an expansion of activity, with services slightly
outpacing manufacturing. Looking across the zone, growth decelerated, but
remained relatively solid in Germany, Spain and Italy, with France accelerating
to a three month high. The eurozone is Scotland’s main overseas trading
partner, so increased economic growth should help to boost demand for
Scottish goods and services. However, this may be offset by the stronger
pound which will make Scottish exports to the eurozone more expensive. The
unemployment rate across the zone remained unchanged for August at 11%.
Inflation in the eurozone was -0.1% in September. The negative rate was
mainly due to lower energy prices and was the first time the rate had turned
negative in six months. The European Central Bank had previously warned that
inflation could turn negative again this year. It now expects inflation to be 0.1%
for 2015 as a whole, rising to 1.5% in 2016.
Growth in China, the world’s second largest economy, slowed to 6.9%
(y/y) in Q3 2015. This is the weakest rate since the global financial crisis and
below the government’s target of 7%. Business survey data for September
indicate that the slowdown may be intensifying, with the manufacturing sector
contracting for the second consecutive month. New orders fell at their quickest
rate in over three years, driven by a sharp fall in new export orders.
UK Trends
UK inflation returns to negative territory. The Consumer Price Index (CPI)
fell to -0.1% in September; the UK inflation rate has been at or around 0% for
most of 2015. The negative rate was mainly due to falling motor fuel prices and
a smaller than usual increase in clothing prices. The Bank of England expects
inflation to bounce back towards its target of 2% next year. The Bank kept UK
interest rates on hold at 0.5%.
Business surveys suggest UK service sector is losing momentum, as
growth slowed to its lowest rate in nearly two-and-a-half years. Despite a
slowdown in business activity and new order growth, there was a strong rise in
service sector employment. Firms reported that global economic uncertainty is
causing some clients to delay new orders, and weakness in the manufacturing
Monthly Economic Commentary: Slower growth approaching
sector is also having an affect on business activity, particularly for industrialrelated services.
UK manufacturing performance remains lacklustre, with activity falling to
a three month low in September. New order growth slipped to its weakest
pace in a year. Manufacturers also recorded job losses for the first time since
April 2013. New export orders increased marginally, but overall the domestic
market remains the main contributor to growth.
UK construction output accelerated to a seven month high. Survey data
for September signalled an overall expansion of business activity, with
increases in output and employment. The volume of new work also rose, but
the pace eased from June’s peak. Across the sector, house building remained
the fastest growing area, hitting a one-year high; commercial development also
rose sharply.
In the labour market, UK unemployment fell to a seven year low. In the
three months to August, UK unemployment decreased by 79,000 on the
previous quarter, to reach 1.77 million. The ILO unemployment rate now stands
at 5.4%, the lowest rate since Q2 2008. Employment stood at 31.1 million, an
increase of 140,000 on the previous quarter. The employment rate is at a
record high of 73.6%.
Scottish Trends
The Scottish economy grew by 0.1% in Q2 2015 (compared to growth of
0.7% in the UK). On an annual basis, comparing the latest quarter with the
same quarter in the previous year, Scottish GDP growth was 1.9% (the UK
grew by +2.4%). Over the quarter, service sector GDP (which accounts for
75% of the economy) was flat; production GDP fell by 0.8%, and within this
manufacturing contracted by 1.1%. However, construction grew by 3.5%,
driven by continued strong investment and support from public spending in
Scotland.
The latest Bank of Scotland Business Monitor suggests that the Scottish
economy continues to recover from the slowdown at the start of 2015. In
the three months to August 2015, 36% of businesses reported an increase in
turnover, 36% reported no change and 28% reported a decrease. The net
balance of +8%, was marginally up on the +7% reported in the previous quarter.
Figures for service sector firms were better than for production, with a net
October 2015
balance of +12% reporting turnover growth in services, compared to only +3%
for production. There was an improvement in the volume of repeat and new
business; however, export activity declined for the second consecutive quarter.
Business expectations remain positive, with a return to moderate growth
expected in the third quarter. However, export expectations for the next six
months have fallen for the second consecutive quarter, driven by a rise in
uncertainty due to a slowing world economy and the rising value of Sterling.
The more recent Bank of Scotland PMI business survey indicates that
private sector output declined for the first time in six months in
September. Overall, the volume of new orders fell marginally and new export
orders declined for the eighth consecutive month. Sector data showed that the
decline was broad-based with falling output in both manufacturing and services.
Manufacturing firms reported a fall in new orders from both domestic and
overseas markets. Despite this, there was modest expansion in employment
levels across both areas.
Scottish international manufactured exports fell in the second quarter of
2015. The Scottish Index of Manufactured Exports showed that the volume of
manufactured overseas sales decreased by 2.3% (real terms) in Q2 2015.
Volumes are now around 0.9% below their pre-recession peak in 2007 but
almost 20% above their trough in 2009. Over the quarter the largest
contributors to the decline were from Food and Drink (-3.9%) and Engineering &
Allied Industries (-4.4%) – these sectors together account for more than half of
international manufactured exports from Scotland. The decline in Food and
Drink was driven by a sharp fall in Drink exports, down 5.7% following strong
growth in the previous quarter. Food exports increased by 3.9%. On an annual
basis (comparing the most recent four quarters to the previous four) the volume
of manufactured exports to overseas markets grew by 3.2% (around the same
as the UK at 3.1%).
Scottish unemployment rose by 18,000 in the three months to August
2015 to reach 170,000, in contrast to the UK as a whole where unemployment
fell to a seven-year low. The Scottish ILO unemployment rate now stands at
6.1% (compared to 5.4% for the UK as a whole). The total number of people in
employment is 2.61 million, a decrease of 6,000 over the previous quarter. The
Scottish employment rate is 73.7%, marginally higher than the UK rate of
73.6%.
October 2015
Monthly Economic Commentary: Slower growth approaching
Performance of SE Account Managed Companies
Scottish Enterprise regularly seeks feedback from Account Managed (AM)
companies on performance and expectations in relation to turnover, profitability,
employment and exports. Over the period July to September 2015, over 500
companies were surveyed.
Performance & Expectations July to Sept 2015
(% of firms reporting an increase)
80%
70%
60%
50%
A majority of companies (62%) reported increased turnover over the six months
prior to survey, with 21% reporting a decline (a net balance of 41%). A lower
proportion (around 50%) reported increased profitability and employment; this
suggests that some companies are experiencing pressure on profit margins and
are able to increase turnover using existing staffing levels, so increasing
productivity. Around 70% of the companies surveyed were international
exporters, and of these around half reported increased overseas sales.
40%
30%
20%
10%
0%
Turnover
There has been a decrease in the net proportion of companies reporting higher
turnover in the July to September 2015 quarter (+42%) compared to the same
quarter a year ago (+48%).
Looking ahead, the majority (75%) expect turnover to grow over the coming six
months with a similar proportion (71%) expecting profitability to increase.
Exporting companies are generally optimistic about their future export sales
with 75% anticipating an increase. These figures overall seem to suggest a
different performance for AM companies than for Scottish businesses overall.
Profitability
Last Six Months
80%
Employment
Exports
Next Six Months
Turnover Performance
(% of firms responding)
64%
62%
60%
40%
20%
0%
-20%
-16%
-21%
Jul - Sept 2014
(base: 466)
Jul - Sept 2015
(base: 493)
-40%
Increase
Decrease
Monthly Economic Commentary: Slower growth approaching
Implications for Scottish Enterprise
The latest data suggest that growth in the Scottish economy is slowing. In
particular, expectations for future export performance have fallen, continuing a
trend that has been building for a while now. The outlook is positive in the US
and the eurozone economies, Scotland’s main overseas trading partners, which
should help boost demand for products Scotland exports. However, exports to
the eurozone in particular are being hampered by the appreciation of sterling
against the euro, making Scottish exports more expensive. Ongoing trading
conditions are likely to remain challenging for Scottish exporters, particularly for
manufacturing firms, making it difficult for them to break into new markets or
become first time exporters. Overall this suggests a continuation of the
importance of selling to the rest of the UK and a requirement for robust growth
at the UK level. Improving competitiveness, particularly through increased
productivity levels, will be a key factor for Scottish firms to compete at home
and overseas; this could be helped by increasing innovation, investment and
developing higher skills across the workforce.
Strategy & Sectors
October 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.
October 2015