Monthly Economic Commentary: ... a ‘cocktail’ of economic risks?
Global Trends
Global growth fell short of expectations in 2015 according to the World
Bank, slowing to 2.4% from 2.6% in 2014. The disappointing performance
mainly reflected a continued slowdown in emerging and developing economies
amid post-crisis lows in commodity prices, weaker capital flows and subdued
global trade. Global growth is projected to edge up in the coming years, but at a
slower pace than envisaged in its previous forecast.
World Bank Forecasts
2015
2016
2.4
2.5
1.5
0.8
2.4
6.9
2.9
2.7
1.7
1.3
2.4
6.7
(annual GDP growth)
Global
United States
Euro Area
Japan
UK
China
In the world’s largest economy, the US, a strong dollar and weak global
demand weighed on manufacturing activity in December, when the PMI
business survey recorded the weakest growth since October 2012 and the ISM
manufacturing index fell by 0.4 percentage points to a post-recession low. The
Federal Bank’s decision to raise interest rates suggests they are confident
about continued recovery, although recent data indicate growth is softening.
The strong dollar is affecting exports and domestic sales as firms compete
against inflows of cheap imports. There are also signs that consumers are
becoming more cautious about spending since interest rates went up. The
strong dollar will make Scottish exports relatively cheaper; however, as one of
Scotland’s main export markets a slowdown in demand in the US could be
challenging. Nevertheless, there is strong jobs growth: 292,000 jobs were
added to the economy in December and the unemployment rate remained at
5%.
Concerns about China, the world’s second largest economy, have resulted
in falls in global stock prices and a stronger US dollar. This January has been
the worst start for Chinese markets in twenty years. The year started with steep
declines in equities and another fall in the currency due to capital flight caused
by investors who believe that the economy may be slowing at a faster rate than
previously forecast. China ended 2015 with probably the weakest growth rate
January 2016
in a quarter of a century (6.9%), although trade figures for December were
better than commentators had expected, increasing for the first time since June
and increasing by 2.3% over the year.
Japan, the world’s third largest economy, is out of recession. Moreover,
revised data show that the economy was growing strongly in the third quarter of
2015 with business investment the main driving force. There was also a
marked improvement in manufacturing conditions at the end of 2015 according
to the PMI business survey, as new orders and output increased at significant
rates.
Domestic demand in the eurozone is strengthening. December’s PMI
business activity index rose to its highest level since the second quarter of
2011. Activity increased in each of the four largest eurozone economies
(Germany, France, Italy, and Spain) and the headline index has now recorded
growth for 30 consecutive months. This is good news for Scottish exporters as
the bloc is our main overseas trading partner. However, sluggish inflation will
put pressure on the European Central Bank to act further to boost the economy.
Inflation is very weak and has now been well below target for more than two
years, which, when combined with sluggish growth, is not good for the
economy. The main drag on inflation is from low oil prices. This may diminish
through 2016, although price competition is also intense and pay growth is
weak, so it is likely that any increase in inflation will be modest.
UK Trends
The UK economy has not been growing as strongly as previously thought.
GDP growth figures have been revised downwards from 0.5% to 0.4% for the
third quarter of 2015. The annual rate was also revised down from 2.3% to
2.1%, the slowest rate of growth in two years.
The World Bank is now forecasting UK growth of 2.4% in 2016, 0.2
percentage points lower than the 2.6% forecast in June last year. The UK is the
biggest single market for Scottish products so this is bad news for our
businesses. In a recent speech, the UK Chancellor of the Exchequer said the
UK economy is facing a number of challenges - including slowing growth in
China, tension in the Middle East and low commodity prices such as oil, gas
and iron ore – which are weighing on global confidence. Falling or continuing
low oil prices could have a further negative impact on the UK economy.
Monthly Economic Commentary: ... a ‘cocktail’ of economic risks?
UK industrial output fell in November. This was the biggest monthly fall for
three years and resulted in the pound hitting its lowest level against the euro
since February 2015. The index of production is estimated to have decreased
by 0.7% between October 2015 and November 2015, reflecting declines in all
sub-sectors (manufacturing, mining & quarrying, utilities and waste
management). However, over the year the index increased by 0.9%: the only
decline was in manufacturing, which fell by 1.2%.
The PMI business survey reported slowing growth in the UK
manufacturing sector in December, although output rose for the thirty-third
month running, underpinned by higher volumes of new business from domestic
and export clients. New export orders rose for the fourth consecutive month.
Nevertheless, slowing growth suggests that manufacturing output over 2015 as
a whole may have been below the level achieved in 2014. Services continued
to grow in December, although at a slower rate in recent months than in the first
half of the year. Expectations about future workloads in the services sector fell
to the lowest recorded level for almost three years: firms are becoming more
cautious amid uncertainties such as global economic growth.
The manufacturers association EEF has revised down its output forecast
for the sector in 2016 amid concerns about world trade growth, a decline in
export orders and the domestic market looking considerably less supportive
than has been the case in recent years. EEF is forecasting manufacturing will
contract by 0.1% in 2015 and recover slightly to grow by 0.8% in 2016.
Manufacturers are scaling back their hiring and investment plans for the first
time in almost six years as their confidence falls due to slower global trade. The
EEF says job prospects have also been affected by the downturn in the oil and
steel sectors.
The UK trade deficit narrowed slightly in November (and over the latest
quarter). Although exports fell, imports fell at a faster rate, particularly oil which
fell by £0.5bn. Over the three months to November exports fell by 1.5%
compared to the same period the previous year and, as global demand
weakens, trading conditions will become even more challenging for UK
exporters.
Official figures show that unemployment in the UK fell to its lowest rate
(5.1%) in 10 years in the three months to November. There were nearly 31.4
million people in work – more than half a million more than a year earlier - and
January 2016
the employment rate was 74.0%, the highest since comparable records began
in 1971.
Scottish Trends
The Scottish economy grew by 0.1% in Q3 (compared to growth of 0.4% in
the UK). The services sector (which accounts for around 75% of the economy)
grew by 0.3%; the production sector (18% of the economy) fell by 1% driven by
declines in the manufacturing and utilities sub sectors. Construction (6% of the
economy) had the strongest growth over the quarter (+0.9%). On an annual
basis, comparing the latest quarter with the same quarter of the previous year,
the economy grew by 1.7%.
The EY Scottish ITEM Club has reduced its forecast for Scottish GDP
growth to 1.8% in 2016. This compares with a UK GDP growth forecast of
2.4%. ITEM note that the Scottish services sector seems to be underperforming
the UK by a wide margin and, as in the UK, stalling world trade growth is
holding back manufacturing.
The Scottish economy slowed in the final quarter of 2015. Weakness in the
global economy is affecting exports and the low price of oil is affecting activity
across the country, and particularly in the North East of Scotland, according to
the results of the latest Scottish Business Monitor business survey from the
Fraser of Allander Institute. Across Scotland, levels of new business eased
during the three months to the end of November; however, expectations are
that the slowdown will end and that the pace of the recovery will improve,
although expectations for export activity in the next six months have fallen.
The Scottish private sector returned to growth in December, driven by a
slight increase in new business, but the rate of growth was only marginal
according the Bank of Scotland PMI business survey. Growth was led by
service providers as manufacturers registered a further decline in production as
they struggled to cope with a lack of orders from domestic and foreign markets.
Services extended its current sequence of growth to three months. Activity was
driven by financial services companies as the travel, tourism & leisure and
business services sectors both registered declines.
Exports of goods from Scotland fell by -7.2% to £18.2 billion over the year to
September 2015 according to HMRC trade statistics for Q3. Most of the decline
was recorded in Q1 2015, and was mainly due to a fall in sales to non-EU
Monthly Economic Commentary: ... a ‘cocktail’ of economic risks?
countries, particularly the US. Non-EU partner countries, however, continue to
dominate exports from Scotland, accounting for over 60%. The biggest
declines were in exports of mineral fuels, lubricants & related materials, down
by £894m (50%) and manufactured goods, down £182m.
Scottish business R&D (BERD) expenditure fell by 0.5% in real terms in
2014 compared to 2013 (-£4.2m), according to newly released data. Scotland
was outperformed by the UK, where expenditure increased by 4.5% in real
terms over this period. USA owned businesses accounted for almost half of
expenditure in Scotland and the largest 10 private sector business R&D
spenders accounted for more than 40%.
The number of unemployed people in Scotland fell by 19,000 over the three
months to November 2015, resulting in an unemployment rate of 5.4%
(compared to 5.1% in the UK). Scotland’s employment rate is still above the
UK (at 74.9% compared to 74.0%), with overall employment increasing by 1.2
percentage points over the quarter (compared to an increase of 0.5 percentage
points in the UK). Over the quarter, the number of people in employment in
Scotland increased by almost 21,000: an increase of nearly 23,000 men in
employment was offset by a fall of 2,000 women. Scotland’s youth employment
rate was still higher than the UK in the three months to October (61.4%
compared to 54.7%). The unemployment rate was also higher (14.3%
compared to 13.6%) but this is due to a lower youth inactivity rate in Scotland.
Focus on the North East of Scotland
Scottish Enterprise regularly seeks feedback from account managed (AM)
companies on business performance. For this commentary an assessment of
trends facing 40 AM companies in the North East of Scotland for the period July
to December 2015 has been undertaken. The trends suggest that the downturn
in the oil & gas sector is affecting a number of our AM companies in the region:
 Over the period, the proportion reporting decreases in turnover, productivity,
employment and exports was higher than the average for all SE AM
companies, with oil & gas companies reporting falls.
 Comparing performance with the same period in 2014 shows a significant
decline in the net balance of North East AM companies reporting growth in
turnover, profitability and employment, again driven by weaker oil & gas
company performance. The small increase in exports may reflect a strategic
January 2016
decision to look outside the UK for opportunities as production elsewhere
remains high.
Monthly Economic Commentary: ... a ‘cocktail’ of economic risks?
Other insights on economic trends in the North East include:





The downturn in oil & gas and the resulting loss of jobs has seen a
significant increase in the number of skilled people enter the job market and
competition for available positions. However, although the talent pool has
increased, there remains a problem with high salary expectations amongst
those leaving oil & gas and looking to enter new sectors/industries.
The downturn is reducing opportunities for recent/new university graduates,
with a 50% fall in junior manager vacancies.
Some oil & gas companies are looking to diversify by developing new
products and services and looking at opportunities outside the UK, but this
takes time.
Some oil & gas supply chain companies are identifying efficiencies in terms
of processes and use of machinery.
Aberdeen is now experiencing “secondary effects" of the lower oil price. For
example, Aberdeen’s hotels experienced a 13% drop in occupancy levels
and a 22% drop in revenue per available room in the year to July.
Evidence from the labour market includes:




Currently, approximately 8,800 possible redundancies reported by oil & gas
companies since July 2014.
157 oil & gas employers have reported approximately 19,000 employees as
being under threat of redundancy since January 2014.
57 Modern Apprenticeship redundancies in the oil & gas sector in 2015, but,
more promisingly, 37 of them have been re-employed.
Aberdeen City and Aberdeenshire were two of the three local authorities in
Scotland with rising claimant count unemployment in the year to December
2015 (the third was Shetland which may also be related to the oil & gas
downturn.)
Implications for Scottish Enterprise
The impact of declining oil prices on business activity in Scotland together with
downward revisions to growth forecasts for Scotland, the UK and international
trading partners mean that trading conditions are likely to be challenging for
Scottish businesses in 2016. We will continue to monitor the impact of the
downturn in oil prices, and how best to assist affected companies. Firms trading
internationally will be helped by a recent fall in the value of the pound against
January 2016
the dollar (following the US interest rate rise) and the euro (as the bloc’s
economy strengthens), but within an overall global economic context of
subdued demand. This will create a very competitive trading environment so
improving competitiveness, particularly through increased productivity levels,
will be a key factor for Scottish firms to compete at home and overseas, and
could be helped by increasing innovation, investment and developing higher
workforce skills.
Strategy & Sectors
January 2016
_______________________________________________________
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
(Jennifer.Turnbull@scotent.co.uk) or phone 01786 452010.