Is Scotland weathering the oil and gas storm?

A difficult year…

The pace of Scotland’s economic growth in 2016 is predicted to be the poorest since 2012, according to the EY Scottish ITEM Club. While still expanding, Scotland’s GDP growth for 2016 has been downgraded to 1.2 per cent representing a 0.6 per cent decrease from the prediction EY Scottish ITEM Club released six months ago.

Chart 1

Unsurprisingly, the contributing factors to this downgrade include the challenging global trade environment and Scotland’s continuing vulnerability to the fallout from the oil price slump. However there does also appear to be an, at least partly-related, underperformance in key parts of the service sector that is impacting growth adversely.

…with a substantial gap appearing between Scotland and the UK…

The latest data reveals that Scotland is underperforming the rest of the UK by a greater margin than has been typical in recent years. The slight positive is that while still underperforming UK growth, the gap should be smaller next year. The drop in the value of oil production means that there has been a sharp decline in oil-inclusive Scottish GDP per capita relative to the rest of the UK. At the end of 2015, it was 1.6 per cent lower in Scotland than the rest of the UK, compared with 2013 when Scotland led the UK by 7.5 per cent.

Employment trends are also diverging with the number of people in Scotland with jobs falling by 1.5 per cent since late 2014. In the UK the comparative figure has increased by more than 2 per cent. Once again the greater exposure to the oil price decline is impacting Scotland disproportionately more than the rest of the UK.

Chart 2

…but a more positive situation with Manufacturing.

Manufacturing is the one major sector where Scottish output growth in 2016 is forecast to match or outperform its UK counterpart. However, at 0.3 per cent, growth in this sector still falls behind overall non-oil GDP. All manufacturing sectors manage to make positive growth except the globally-challenged Metals and Machinery sector which is expected to experience a decline of 1 per cent in output this year. At the other end of the scale, food and drink remains the sector within manufacturing delivering the best growth, with output anticipated to expand by 1.2 per cent this year following on from 4.4 per cent growth in 2015.

Exports are facing challenging conditions…

Growth at the UK level and a better than expected performance of European economies has not filtered through to Scottish exports, with the struggles facing emerging markets adding to the challenges of some of Scotland’s key export sectors. Despite a bright start to 2015, the overall volume of manufactured exports from Scotland to foreign markets fell by nearly 2 per cent in the second half of the year. The EY 2016 UK Attractiveness Survey painted a positive picture of FDI into Scotland especially around software, financial services and business services. With the US and European economies growing, Scottish businesses might want to look harder at the opportunities in these markets in the short term.

Chart 3

…but consumers remain a bright spot.

Consumers remain the bright spot in the economy even though real-terms disposable incomes are expected to grow more slowly in 2016 than in 2015. The expansion of 1.7 per cent for this year will continue to be supportive of household budgets.  As a result, consumers’ expenditure is forecast to grow by 1.9 per cent through the year, much the same rate of expansion as in 2015.

The pace of consumer spending growth is then expected to moderate in line with slowing advances in disposable income, impacted in part by the slowing rate of employment growth.  The EY Scottish ITEM Club forecast predicts consumers’ expenditure growth of 1.6 per cent and 1.2 per cent in 2017 and 2018 respectively.

Future growth

Further rebalancing of the economy and a substantial increase to productivity is required for Scotland to increase growth. The good news is that the increased powers through devolution are leading to robust and innovative city and region growth strategies with the potential to generate greater economic success in Scotland. Businesses need to sit back and think very clearly about their plans for the next few years – a clear focus and smart allocation of capital will be required to succeed in what will remain a challenging economic environment.

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