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Scottish Economic Report: March 2004
Chapter 1: Global, EU and UK Economic Developments
This chapter has three main themes: the first relates to Scotland in the global, EU and UK contexts; the second looks at global and EU developments; and the third considers UK economic developments and prospects.
1.1 Scotland in the Global, EU and UK Context
The rationale for devoting this chapter to the global and UK economies is that the external economic environment is critical to the outlook for the Scottish economy. This section therefore begins by examining the linkages that Scotland has with the global and UK economies. In addition, it is crucial to demonstrate how integrated the various sectors of the Scottish economy are within the global economy, including the importance of Scotland's main trading partner - the rest of the UK. Further to this, Scotland's primary markets for exports and the exposure that Scotland has to economic developments within these countries will be examined. Understanding these linkages between Scotland and the economic areas that are traded with is vital in allowing the Executive to understand the potential size of the impact of any external shocks to the Scottish economy.
1.1.1 Integration with UK Economy and Rest of the World
Scotland, as a small open economy, has extensive trade links with not only the rest of the UK, but also with the global economy. These linkages can be highlighted through the use of the Input-Output Tables and Multipliers for Scotland 2000. The gross value of imports and exports at basic prices between Scotland and the UK, and between Scotland and the rest of the world (RoW) are illustrated in Table 1.1. Scotland has a negative total trade balance (UK and RoW), importing more than it exports. The main source of this is Scotland's trading position with the UK, where exports stand at around 70 per cent of our UK imports.
The position changes when the total percentage is considered, with Scottish exports at around 80 per cent of total imports. However when trade with the rest of the world (excluding the UK) is considered, a different picture is painted. Scotland has a positive trade position with overseas markets, with exports standing at just under 120 per cent of total imports. This implies that Scotland has a positive effect on the UK's trading position with the rest of the world.
The contribution of Scottish trade to total UK trade is analysed using input-output tables for Scotland and the UK in Table 1.2. Scotland's agriculture, forestry and fishing makes the greatest sectoral contribution to the UK total, accounting for 43 per cent of UK exports and 11 per cent of imports. As previously indicated, as a percentage of total UK trade, Scotland exports more than it imports, 10 per cent and 7 per cent respectively.
The export and import intensities of the broad industrial sectors of the Scottish and UK economies, based on total output at basic prices, are illustrated in Table 1.3. The first four columns examine Scottish and UK trade with the rest of the world, while the final two columns look at Scottish aggregate trade with the rest of the UK and the rest of the world.
Looking at Scottish trade with the rest of the world exclusively, it is clear that agriculture etc, mining and production & construction sectors account for the largest proportion of Scottish exports. This indicates that these sectors will be more sensitive to global economic developments and exchange rate fluctuations. In addition, production & construction is the sector which imports the most from the rest of the world. Scottish exports to the RoW account for 16 per cent of total output, while imports account for 13 per cent. These numbers are reversed for the UK, with 16 per cent and 13 per cent accounting for imports and exports respectively, indicating that the UK and Scottish economies have a similar degree of openness.
However the picture changes somewhat when we look at total Scottish exports, which includes the rest of the UK. The ratio of total imports to total domestic output is around 37 per cent, while total exports account for around 33 per cent total demand in the Scottish economy. Agriculture etc, mining and production & construction still have high proportions of their total output in exports. Production & construction is still the largest importer, though all the sectors demonstrate a closer relationship between imports and exports. However, transport & communications and financial services have a high proportion of exports to total output when we include the UK. This indicates that the UK is a key market to both these sectors. It should be noted that the threats to global downturns and exchange rate fluctuations will not be as significant for these sectors, as although they have a high proportion of exports, the majority of the trade does take place across the UK.
1.1.2 Scottish Trade in the Global Economic Environment
As has been shown above, Scotland is dependent on a significant amount of international trade. However, this only tells part of the story, as understanding the destination of Scottish international exports is crucial in appreciating the exposure of the Scottish economy to global developments. Chart 1.1 shows the broad proportions of Scottish total international exports in 2002 1. The majority, around 57 per cent, of Scottish international exports go to the European Union. This suggests that Scotland relies considerably on the economic strength of the region. It also means that the variability of the Euro is important in determining the competitiveness of Scottish products and services.
It should also be noted that North America and Asia cover a large proportion of international exports, around 12 per cent and 9 per cent respectively. The main trading regions of Europe, North America and Asia together represent almost 80 per cent of all the international exports from Scotland. Therefore the economic performance of these areas is not only crucial to the performance of the export sector, but also to the overall performance and strength of the Scottish economy. Exchange rates will play a significant role in determining the price competitiveness of Scottish goods and services. However, consumer confidence, business investment, fiscal & monetary policy in the UK, EU and global economies will all have a bearing on business and household consumption, suggesting that the performance of the Scottish economy is inextricably linked to several factors outwith our own control. This can be considered further by looking at a few countries/markets in more detail; namely the Euro Area (with focus on Germany & France), the United States and Japan.
Table 1.4 shows the proportions of total international exports from Scotland, providing more detail on the intra-EU position. Germany is the main destination for Scottish exports, though North America, Asia and France are not far behind.
Another aspect of interaction between Scotland and the rest of the world is Foreign Direct Investment (FDI). Scotland has a history of attracting FDI, with these investing companies playing a significant role in the development of the Scottish economy. However the trends have changed over recent times and this is discussed in Box 1.1.
Box 1.1 Foreign Direct Investment |
Flows of inward investment into Scotland, particularly in the electronics sector, over the last twenty years have contributed significantly to the restructuring of manufacturing in Scotland and have been an important source of employment growth within this sector. However, with the global restructuring in electronics, which partly reflects the downturn in demand and cyclical nature of their product range, international firms are increasingly outsourcing manufacturing activity to low cost locations. This process has occurred in Scotland with large multi-nationals rationalising output, which as a result has seen electronics output, as measured by gross valued added, decline by 40 per cent in Scotland since 2000, (See Chapter 3). Not surprisingly, inward FDI flows have also fallen, as is reported in Table 1.5. 
However, this phenomenon has not been exclusive to Scotland. The United Nations provides data on inward investment flows for the UK over the same period. For comparison, Table 1.6 reports the shares of inward investment in Scotland as a proportion of total UK inward investment. In terms of employment secured, with the exception of 1998/99, Scotland has still performed better than the UK as a whole over this period. 
Chart 1.2 graphically depicts the trend in global inward investment since 1990 to 2002. Inward investment flows across the developed countries and the EU grew consistently up until 2000. Since then there has been a decline in the flows. Although not as pronounced, the position of the developing countries is similar. Growth did take place up until 2000, though there has also been a decline in the levels since. |
| Chart 1.2 Inward Investment Flows |
The position in the UK (Chart 1.3) is similar, with growth taking place throughout the 1990s. However in 2000 it appears that a peak was reached, and a decline of similar proportions to those that were witnessed for the developed nations and the EU took place. However Eastern & Central Europe has demonstrated a different trend, as Chart 1.3 shows. Inward investment to the area has continued since 1990, in contrast to the trend witnessed in the developed countries. |
| Chart 1.3 Inward Investment Flows |
The lower cost and relative skill base enjoyed by this area and the widening access to the European Union make these countries an attractive location for low value added manufacturing. The emergence of Eastern Europe would suggest that the UK, and Scotland in particular, is a less attractive base for outsourcing these type of activities. However, given the continued presence of multi national activity within Scotland and the importance of intra-firm trade, Scotland remains well placed to compete for the increasingly higher value added investment. This will require a strong skills and knowledge base, and will characterise future FDI flows within the developed countries. |
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