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.