A good year for Scotland…
The latest EY Scottish ITEM Club forecast confirms that Scotland has had a good year with expected growth of 2.8% in GDP in 2014, including a strong capital spending performance, better than in any year since 2007. This compares with EY ITEM Club’s forecast of 3.1% for UK GDP growth this year. Drilling down further, Scottish performance was very similar to the UK as a whole.
Growth across the UK helped push up Scottish non-oil exports to the rest of the UK, however the value of overseas exports suffered from continuing weakness in the Eurozone, slower growth in key emerging markets, the clampdown on luxury gifting in China and the strength of sterling through the middle of the year.
The data suggest that 2014 was the year when Scotland caught up with the UK as a whole in terms of jobs growth from the low point in mid-2009, with a higher overall employment rate. Scotland had been lagging the UK in terms of the rate of job creation but this gap has now closed. The availability of skilled workers is likely to become an increasing issue for Scottish employers.
The main differences between Scotland and the rest of the UK appear to be:
- The consumer appears to have been more cautious in Scotland this year than in the rest of the UK. To some extent this is pay-back from 2013 when Scots were more ready than their counterparts south of the border to reduce saving to boost consumption.
- Average house prices remain more affordable in Scotland than almost anywhere else in Britain. For example the average mortgage requires around 21% of average earnings to service, compared with 30% for the UK as a whole and highs of 38% and 44% in the South East and London respectively.
…but the signs point to a slowing outlook…
Just as for the UK as a whole, with at best a slow improvement in international markets in prospect in 2015, much now hinges on Scotland’s investment performance to drive growth. It is yet to be seen, as has been the case for the UK data, whether the new methodology for calculating GDP will show Scotland’s recent record for investment in an even better light.
Further investment by businesses in Scotland faces a number of headwinds. Only time will tell if Scotland will experience the same types of “uncertainty” effect that hit Quebec after its referendums; the possibility of a post-election EU-referendum opens up a new range of uncertainties; stumbling whisky exports could slow the investment boom in the sector; and, if the lower oil price is sustained, both North Sea and renewables investment may suffer.
Given the global backdrop and the slight cooling in the UK economy, GVA growth for Scotland in 2015 is now forecast to moderate to 2.0%. This compares with growth of 2.4% for the UK as a whole. With continued employment growth and real increases in pay consumers’ expenditure growth is expected to increase slightly to 2.1% in 2015.
…with the risks being more to the downside…
Average As well as the political risks, weakness in the Eurozone and emerging markets, missteps in monetary policy decisions on either side of the Atlantic and continued weak wage growth could undermine the recovery from here, however the plunge in the oil price, if sustained, would be good news for much of the Scottish economy and household budgets. Overall though the balance of risks is to the downside.
…so business must remain vigilant…
EY’s most recent Capital Confidence Barometer found that 86% of UK businesses were confident about future earnings, up from 50% a year earlier and this despite their optimism over future economic performance falling in the period. Deeper analysis suggests much of this confidence derived from a belief in their ability to manage costs as necessary, though it may also reflect a feeling that the central bankers would step in to help if a crisis emerged.
However, the 3rd Quarter of 2014 saw the highest number of profit warnings in this quarter since 2008, suggesting this confidence may be misplaced. This conflicting data perfectly illustrates the challenges of forecasting in the new economic environment in which we find ourselves. The past is not necessarily a good guide to the future and more vigilance is required.
Businesses operating in Scotland must pay close attention to the economic data as it emerges, and continue to monitor closely both their own performance and that of their customers and suppliers. Scenario analysis to ensure they are positioned for alternative outcomes will be useful and contingency planning around key risks is a sensible course of action.