March 15, 2013
by Dr Gary Gillespie
This State of the Economy Report comes after a disappointing 2012 – a year when it had been hoped that economic fortunes would improve and momentum would finally return to the global economy. However, the economic outlook is more positive than this time last year. The Report focuses on the business sector, as in a climate of deleveraging by both governments and households and with world trade remaining fragile, the performance of the business sector will be key. Therefore 2013 could be pivotal for business and recovery in Scotland.
Recent Global Economic Developments
The Euro Area was a source of uncertainty throughout 2012 though some relative calm was restored in the second half of the year with European Central Bank purchases of short-term sovereign bonds and progress toward formation of a banking union. However, on-going political uncertainties, along with remaining underlying structural weaknesses, will lead to economic conditions in the Euro Area remaining fragile for the foreseeable future.
The US narrowly avoided a steep fiscal cliff at the end of 2012. Although fiscal retrenchment is still necessary, this has been delayed and will be more gradual than feared. This will still however, act to dampen growth in the world’s largest economy and a key export market for Scotland.
The UK economy is estimated to have fallen back by 0.3% in the final quarter of the year, following a bounce-back in the economy in Q3. Given the prevalence of temporary factors influencing individual quarterly growth rate figures, it is perhaps more informative to consider growth over the year as a whole, with output growing by just 0.2% in 2012. Nearly five years on from the start of the crisis, output remains some 3.0% below pre-recession levels.
Recent Scottish Economic Developments
The most recent data for the Scottish economy showed welcome growth of 0.6% in the third quarter of 2012. This was encouraging as it appeared to reflect evidence of a degree of underlying strength in the economy. The UK figure was slightly stronger though this was influenced somewhat by the temporary impact of the Olympics which boosted growth to 1.0% in the same quarter.
The labour market in Scotland has shown mixed signals in recent months; the unemployment rate has fallen recently but employment and inactivity levels have worsened in the past few months with fewer people in employment and seeking employment. There has however, been a substantial drop in youth unemployment from a peak in late 2011 and early 2012.
An increase in self-employment has been reflected in a rise in business start-ups. As part of the assessment of the business sector in Scotland, we analyse the structure of the business sector in Scotland, start-ups, insolvencies, investment trends and export performance.
The global economy faces a number of challenges over the long-term, however, the uncertainty that characterised much of last year in terms of the immediate outlook for the global and Euro economies has undoubtedly improved compared to Summer 2012.
Forecasts for global growth in 2013 are still low by historic standards but an improvement on 2012. There is even the possibility for the growth outlook to be revised up as the year progresses.
Therefore, 2013 has the potential to be a pivotal year for business in Scotland within the context of the recent recession.
The Scottish economy has already experienced a significant period of deleveraging and in some parts of the corporate sector there are excess cash holdings. This means that in an environment of increased confidence and less short term uncertainty, investment by business may be likely to pick-up.
Headwinds of course still exist, however an improving external environment, coupled with the full effects of the deleveraging process beginning to ease, has the potential to improve business confidence and investment. Such a cycle can drive a sustainable recovery in the medium term.
As last year, we still expect the Scottish economy to return to near trend growth by the end of 2014 as well as returning to pre-recession levels of output close to the end of that year.