Economic Commentary
– July 2014 was at its highest level in 22 years in June and companies Monthly Economic Commentary
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Growth picking up in the US, China and Japan – weaker in the eurozone
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The UK economy is growing strongly
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Output in Scotland exceeds pre-crisis levels and business surveys are positive
Global Trends
The US economy , the world’s largest, contracted by 2.9%
(annualised rate) in Q1 2014, although this was largely due to extreme weather. The latest data suggest a rebound in Q2 with manufacturing output growth accelerating for the third month running in June, supported expect stronger profits, orders and sales over the next six months, raising hopes of continued economic growth.
The manufacturing Purchasing Managers’ Index (PMI) business survey reported that British factories enjoyed one of their best quarters of output growth in 20 years in Q2, with its June index the second-highest for 40 months. The domestic market was the prime source of new business and sales, although the rate of growth in new export orders accelerated to a 5-month high with an increase in orders from Europe, Asia and the Middle East. Service sector PMI data also showed rapid growth, encouraging companies to by a steep rise in new business volumes, and the unemployment rate dropped to 6.1% with 288,000 new jobs added to the economy. The US central bank, the Fed, delivered an upbeat statement on the health of the take on more workers. Trading conditions remain positive and market confidence high among UK service providers.
The strong PMI manufacturing data has boosted economy and continued to slow its quantitative easing.
Strong US economic performance is good news for
Scottish exporters as the US accounts for 15% of international sales.
expectations that the Bank of England will become the first major central bank to increase interest rates, prompting the pound to hit a 6-year high against the dollar. An increase in interest rates would strengthen the pound
C hina, the world’s second largest economy, has been experiencing relatively weak growth over recent months. further, making UK exports less competitive, although the cost of imports would fall. Total UK exports fell by more than 4% in May compared to May the previous year.
However, business survey data for June showed that output rose for the first time since January and new export orders rose for the second month running.
In Japan, the world’s third largest economy, business surveys reported an increase in output and new orders for the first time in three months in June. However, the Bank of Japan's (BoJ) Tankan survey reported a dip in business sentiment over the three months to June, the first time
In stark contrast to the bullish PMI data, official figures showed manufacturing output falling by 1.3% between
April and May, ending a run of strong data. The strength of sterling against the euro is likely to be a factor. The main subsectors declining were metals & metal products, pharmaceuticals and electronics. In the three months to
May 2014, official figures show that both production and manufacturing output was still below the levels reached in business optimism has deteriorated in six quarters, but the survey did indicate that sentiment is likely to improve in the coming months. The BoJ is holding off from expanding its stimulus programme saying the economy is recovering the pre-recession peak in 2008.
Official statistics suggest that manufacturing productivity is improving in some sub sectors. Overall manufacturing despite activity taking a hit from April's sales tax increase.
The IMF notes that the eurozone economy is gradually improving but recovery is turning out to be weaker than productivity increased by 3% in Q1, with the gains concentrated in the high-tech sectors of computing, electrical products, machine tools and transport equipment. Across the sector as a whole, however, expected. Not all countries are growing, output and investment are still well below pre-crisis levels and high unemployment persists. Warning of the risk of deflation,
(the eurozone inflation rate remained at 0.5% in June), the productivity is still lower than pre-recession levels.
The UK labour market continues to perform strongly.
There are almost a million more people in employment in
IMF urged the ECB to consider US-style quantitative easing to stimulate growth.
Latest business survey data highlight the zone’s challenges. Although manufacturing is still growing, activity dipped to a 7-month low in June and there was a slowdown in every nation except Ireland and Spain. In the UK than a year ago and employment is at a record high. Unemployment fell to its lowest level in nearly six years in the three months to May, with the number out of work down by 121,000 to 2.12 million. The unemployment rate also fell from 6.9% to 6.5%. The latest figures show that wage rises, excluding bonuses, are at their lowest since 2001, rising by 0.7%. With inflation currently running at 1.9%, this suggests that real wages are still being
France and Greece output contracted. Output growth of the service sector also slowed over the month. As Europe is Scotland’s major export market (accounting for 45% of our international exports), the slowdown will be of concern to our exporters. squeezed.
Scottish Trends
UK Trends
Business surveys show that the UK economy is growing strongly. According to Lloyds Bank, business optimism
GDP grew by 1.0% in Q1 (compared to UK growth of
0.8%) and output in Scotland is now 0.4 per cent above its pre-recession level (UK GDP is still below). Improvement over the quarter was broad-based, with growth in
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.

Economic Commentary
– July 2014 manufacturing and services, although the construction 2014, 110 company reviews were carried out. 65% of AM sector declined by 1%. Over the quarter the services sector (which accounts for 72% of the economy) grew by
0.9% and manufacturing grew by 3.4%. A rebound in chemical sector output following the Grangemouth closure in Q4 2013 may be a factor in Q1 ’s overall strong performance.
According to the Scottish ITEM Club, Scotland is set to enjoy its best year of economic growth since the financial crisis and has raised its growth forecast to 2.4% for 2014.
As well as benefitting from a revival of consumer confidence, improvements in the overall UK economy are companies surveyed reported turnover growth over the previous six months and 50% reported growing profits. A significant minority (22%) reported a reduction in operating profits. feeding through to better Scottish performance.
The Bank of Scotland PMI business survey reported an increase in private sector growth in June with the secondfastest rate of job creation in the survey’s 16-year history and extending the current run of overall growth to 21 months. Manufacturers and services firms both reported accelerated growth in output. Export sales stabilised in manufacturing, ending a four-month run of contraction, with a number of firms noting the US market as a source of new business.
The Bank of Scotland’s Business Monitor, covering the three months ending May 2014, reported the best results in almost 7 years for turnover growth among surveyed companies, along with a recovery in export activity.
The majority of AM companies surveyed were overseas exporters (60%). On average, exports accounted for 34% of companies ’ turnover. Europe is the main export market for most companies (50%), followed by North America
(20%). Export performance varied depending on the market. Almost 60% of companies increased exports in
North American markets but fewer than 50% increased exports in European markets. The biggest increase in exports was to Asia (65% of companies); although this was an export market for just over 10% of AM companies. Expectations for the next 6 months are positive, now at levels last seen in 2007.
The FSB’s Voice of Small Business Index (which looks at capacity levels, employment, revenues and the confidence of small firms) continued to climb in Q2, with a lead over the UK economy for the first quarter since Q2 2012. Small businesses in Scotland expect revenues and profits to improve over the next twelve months. The Scottish
Engineering Quarterly Review for Q2 was also positive, showing continued improvement in the performance of
Scotland’s engineering sector, although though exports dipped for the third consecutive quarter. The last time quarterly exports rose was in the three months to
September 2013, following a lengthy period of export decline which ran from December 2011.
Official statistics show that employment in Scotland has grown for the 17th consecutive month, increasing by
12,000 over the three months to May. The employment rate is now 73.3% (compared to 73.1% for the UK) and the total number of people working stands at 2,587,000.
However, unemployment increased by 13,000 over the same period. Over the quarter, Scotland’s unemployment rate increased by 0.4 percentage points to 6.9% while it fell by 0.4 percentage points in the UK to 6.5%. The rise in
Scotland may be due to an increasing number of people entering the jobs market to look for work.
Performance of SE Account Managed (AM) Companies
Scottish Enterprise regularly seeks feedback from account managed (AM) companies. Over the period April to June
AM companies are optimistic about the next six months.
Almost 90% expect turnover to increase and 70% expect an increase in profitability. In the next six months, 15% of exporters plan to target the Asian market. North America and Australasia are target markets for 12% of companies.
Strategy & Economics, July 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 ( Jennifer.Turnbull@scotent.co.uk
) or phone
01786 452010.