Monthly Economic Commentary: Lower Growth Ahead
Global Trends
The OECD downgrades global growth forecasts. The OECD now expects
global growth to be 2.9% this year (marginally down from its 3% forecast in
September), before gradually strengthening to 3.3% in 2016 (down from the
3.6% previously forecast). The OECD states that challenges within emerging
markets, especially China, and a slowdown in world trade are the key factors
behind their forecast downgrades.
OECD GDP Growth Forecasts (%)
Global
United States
Euro Area
China
Japan
United Kingdom
2015
2.9
2.4
1.5
6.8
0.6
2.4
2016
3.3
2.5
1.8
6.5
1.0
2.4
Source: OECD Economic Outlook, November 2015
In the US, the world’s largest economy, economic growth slowed sharply
in the third quarter. GDP grew by 1.5% (annualised rate) in Q3 2015, down
from a rate of 3.9% in the second quarter. The slowdown was largely due to
companies running down stock and inventory rather than producing new goods.
Many analysts expect this to be a temporary effect and growth will accelerate
again in the fourth quarter.
More recent US business surveys indicate that manufacturing activity
slowed sharply while services remain buoyant. Manufacturing growth
slowed to its lowest level in more than two years in October. The slowdown is
due mainly to a strong dollar reducing exports and a decrease in spending by
the oil industry, which continues to take its toll on manufacturing as a whole.
There was positive news from the US labour market: employment increased by
271,000 in October and the US unemployment rate fell to 5.0%, its lowest rate
since early 2008.
The US Federal Reserve kept interest rates on hold in October. The
Central Bank said the US economy was still expanding at a moderate pace and
it was continuing to monitor the global economy and domestic labour market for
signs of strength. Interest rates have been close to zero since December 2008.
Many analysts expected a rate rise will take place in December.
November 2015
Eurozone GDP growth slows marginally to 0.3% in Q3 2015, compared to
0.4% growth in previous quarter. In Germany, the zone’s largest economy,
growth slowed to 0.3%. France also grew by 0.3%, up from the zero growth the
previous quarter. Spain experienced further expansion with growth of 0.8%,
while the growth rate in Italy slowed to 0.2%. The slowdown in overall
eurozone growth in the third quarter is due largely to a decline in exports;
although eurozone exporters are benefitting from the weak euro this is being
offset by muted global demand.
Inflation returns to the Eurozone in October. The inflation rate for October
has been revised upwards to 0.1% from a previous forecast of zero. The main
factor keeping inflation low is energy prices, which are still considerably lower
than last year. The European Central Bank (ECB) has indicated that its
programme of Quantitative Easing (QE) could be extended given the low
inflation rate. The unemployment rate across the zone was 10.8% in
September, the lowest rate since January 2012 but still high compared to other
advanced nations.
Recent eurozone business survey data suggest an upturn at the start of
the fourth quarter. Surveys for both manufacturing and service sectors
indicate expansion in Q4, with services slightly outpacing manufacturing. The
level of new orders rose at its quickest pace in six months. Looking across the
zone the surveys indicate that all of the ‘big four’ economies experienced
expansion, with Spain ranking the highest for both output and new orders. 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 that will make Scottish exports to the
eurozone more expensive.
Economic activity continues to lose momentum in China. GDP growth
slowed to 6.9% (y/y) in Q3 2015, compared to 7% in the previous quarter.
Business survey data for October indicate that manufacturing growth has
slowed. Total new orders declined for the fourth consecutive month, due to
weaker domestic demand. However, new export orders increased, albeit
marginally, for the first time since June. The People’s Bank of China has
recently announced another cut in China’s interest rate to 4.35% (down
0.25pp). The government is hoping that this measure will stimulate spending by
consumers and businesses, increasing domestic demand and helping China
reach its growth target of 7% for 2015.
November 2015
Monthly Economic Commentary: Lower Growth Ahead
Japan, the world’s third largest economy, is back in recession. GDP in
Japan fell by 0.8% (annualised rate) in the third quarter, following a contraction
of 0.7% in Q2. The contraction was driven mainly by domestic weakness.
Although consumer spending picked up, after contracting in the previous
quarter, business investment continued to decline, due primarily to increased
uncertainly over China and the global outlook. On a more positive note, data
pointed to a modest increase in exports over the quarter: the weak yen has
helped competitiveness and there has been growth in Japanese exports to the
EU and US markets, offsetting lower demand from China.
UK Trends
companies clearing backlogs. New export orders increased for the first time
since Q3 2014 with companies reporting improved orders from clients in the
Middle East, East Asia and the USA, but, overall, the domestic market remains
the main contributor to growth.
Continued upturn in the UK construction sector. Survey data for October
signalled continued strong output growth, a rebound in new orders and the
fastest pace of job creation in almost a year. Across the sector, higher levels of
activity were recorded across all three broad categories, with growth being
driven by commercial development activity.
House building and civil
engineering activity also expanded but at a slightly lower level than in the
previous month.
Preliminary GDP estimates indicate that the UK economy grew by 0.5% in
Q3, down from the 0.7% achieved in Q2. The slowdown in growth was due to
weak performance in both the construction and manufacturing sectors; over the
quarter, service sector GDP expanded by 0.7%. Manufacturing output declined
by 0.3% and has now fallen for three consecutive quarters. In construction,
output decreased by 2.2%, the biggest fall for three years.
In the labour market, UK unemployment fell to its lowest since April 2008.
In the three months to September UK unemployment decreased by 103,000 on
the previous quarter to reach 1.75 million. The ILO unemployment rate now
stands at a seven year low of 5.3%. Employment stood at 31.21 million, an
increase of 177,000 on the previous quarter. The employment rate is at a new
record high of 73.7%.
UK inflation rate remains negative. The Consumer Price Index (CPI) fell by
0.1% in October, the same decline as the previous month. This is the first time
that consumer prices have fallen for two consecutive months. The price of
clothing rose, but was offset by a fall in food, alcohol and tobacco resulting in no
change to the overall rate of inflation. The Bank of England’s latest quarterly
inflation report indicates that it will probably be around two years before inflation
reaches its target of 2%.
Scottish Trends
Business surveys suggest UK service sector picked up at the start of Q4.
UK service sector activity expanded in October; however, the pace remained
relatively subdued. The volume of new business continued to rise, with firms
reporting growth from both existing and new customers. The rate of job
creation also strengthened to a five month high. The pick up in the service
sector was accompanied by an upturn in manufacturing and robust growth in
construction, suggesting that overall UK growth has picked up at the start of the
fourth quarter.
UK manufacturing growth regains momentum in October. The UK
manufacturing sector recorded its best performance for more than a year, with
solid improvement in both output growth and new orders. Employment levels
rose for the thirtieth successive month due to improved new orders and
Forecasts for Scottish economy are revised down for 2015 and 2016. The
Fraser of Allander Institute has cut its growth forecast for this year due to the
effects of weaker productivity, poor export performance and the lower oil price.
The Institute is now predicting growth to be 1.9% in 2015, down from an earlier
prediction of 2.5%. The forecast for 2016 was also revised down slightly to
2.2% (down 0.1pp) and growth of 2.5% is now predicted for 2017.
An upturn in Scottish private sector activity, led by the service sector.
The latest Bank of Scotland PMI business survey data indicate that private
sector output picked up in October, reversing the slowdown recorded in
September. Overall, the volume of new business orders stabilised, having
fallen in September, and employment levels expanded. Sector data show that
growth was driven by services, with manufacturing production little-changed
from the previous month. Manufacturers reported a fall in new orders from both
domestic and overseas markets.
Employment levels in service sector
companies increased further in October; however, manufacturing employment
fell for the first time in four months.
November 2015
Monthly Economic Commentary: Lower Growth Ahead
Scottish unemployment rose by 11,000 in the three months to September
2015, in contrast to the UK as a whole where unemployment fell to a sevenyear low. The data suggest that Scottish unemployment has been driven by
female unemployment: 8,000 of the additional people out of work were women.
The Scottish ILO unemployment rate now stands at 6% (compared to 5.3% for
the UK as a whole). The total number of people in employment increased by
6,000 to reach 2.61 million. The Scottish employment rate is 74.1%, marginally
higher than the UK rate of 73.7%.
Profitability Performance Over Last Six Months
April - September 2015
(% of companies responding)
100%
90%
80%
70%
60%
50%
40%
Performance of SE Account Managed Companies
30%
20%
10%
Scottish Enterprise regularly seeks feedback from account managed (AM)
companies on business performance. Over the period April to September 2015,
over 650 companies were surveyed. Of these, a majority reported increased
turnover (+60% of companies) over the six months prior to survey. Looking
across the growth sectors, financial & business services, food & drink and
technology & engineering all had a higher proportion of companies reporting
increased turnover over the last six months compared to the all AM company
average.
Turnover Performance Over Last Six Months
April - September 2015
(% of companies responding)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Financial &
Business
Services
Food &
Drink
Technology
AM
&
Company
Engineering Average
Increased
Creative Life Sciences
Industries
Decreased
Tourism
Energy
Same
Fewer AM companies achieved increases in profitability (55% of companies)
than turnover (60%), which suggests that some may be experiencing pressures
on profit margin. Sectors where companies were most likely to achieve
profitability growth were financial & business services and food & drink.
0%
Financial &
Business
Services
Food &
Drink
AM
Company
Average
Technology Creative Life Sciences
&
Industries
Engineering
Increased
Decreased
Tourism
Energy
Same
Implications for Scottish Enterprise
The latest data suggest that growth in the Scottish economy has weakened;
forecasts have been revised down for 2015 and the outlook remains muted for
2016. Scottish international exports are likely to be impacted over the coming
years by slowing global growth as a result of uncertainty in major emerging
economies and policy actions (e.g. US gradual interest rate rises). In the
eurozone, Scotland’s main overseas export market, exports are also being
hampered by the strong value of sterling. In the UK, the single biggest market
for Scottish products, growth has been broadly static.
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
November 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
(Joanne.Liddle@scotent.co.uk) or phone 0141 228 2242.