State of the Economy - March 2013
Summary of Key Conclusions
- This State of the Economy comes after a disappointing 2012 – a year when it had been hoped that economic fortunes would have improved and momentum would finally return to the global economy.
- Looking forward to 2013, it is hoped that this is the year when the world can leave the aftermath of the financial crisis behind and embark on a sustainable path of growth once again.
- The first cautious signs in the early months of 2013 are positive, with stock markets rallying around the world. As well as reflecting aggressive stimulus policies it also indicates an improvement in economic fundamentals compared to 2012 especially in the US, China and Japan, along with a reduced risk of break-up of the Euro Area.
- However, there are still headwinds in the form of on-going uncertainty in the Euro Area and the US embarking on its first major steps to control its own fiscal balance this year.
- Key to the recovery, in a climate of deleveraging by both governments and households, and with world trade remaining fragile, will be the performance of the business sector.
- This State of the Economy therefore looks at the business sector in Scotland, bringing together findings from recent publications and new datasets, such as the Small Business Survey, to gain an insight into recent developments in this vital sector for the recovery and to assess the outlook for the future.
Recent Global Economic Developments
- Global growth slowed through the second half of 2012 and both emerging and advanced economies posted disappointing growth rates for the year as a whole.
- 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 towards formation of a banking union.
- However, in recent weeks, increased instability has returned to the Euro Area as a result of the inconclusive Italian elections and a lack of clarity amongst policy makers. Government bond yields on peripheral government debt rose sharply indicating market uncertainty over the ability of these governments to continue to make debt repayments.
- This suggests that 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. This fragility will continue to have an impact on trade, confidence and investment – even in countries outside the Euro Area.
- 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.
- Emerging economies also struggled to achieve the high rates of growth seen in 2010 and 2011. Many continue to face domestic pressures from high inflation which limits monetary stimuli. However, China appears to have turned a corner and it is hoped can act as an impetus for growth in the emerging world.
- The UK economy is estimated to have fallen back by 0.3% in the final quarter of 2012, following a bounce-back in the economy in the third quarter. 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 only 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.
- Better than expected survey data at the start of 2013 showed that the adverse weather in January had a smaller impact than was first feared. However, there remain concerns that the economy could remain weak in the first quarter of 2013 with the average of the CIPS/Markit surveys remaining weak in February.
- Overall, our view remains one of a slow start to 2013 with growth picking up throughout the year. The IMF and OECD forecast mild but positive UK growth of around 1.0% in 2013, with most commentators expecting the economy to gain some traction this year though no one has yet fully ruled out a possible ‘triple-dip’.
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 Scottish Q3 GDP data release incorporated new weights and methodologies to the GDP series back to 1998. These improvements make the statistics more comparable to the UK and reflect the structure of the economy more accurately. As a result of these methodological changes, the depth of the 2008/9 recession was revised down marginally from 5.8% to 5.6% and the extent of the double-dip in early 2012 was reduced from three to two quarters. There were also some upward revisions to Scotland’s long-term growth rate estimates.
- 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 with fewer people in employment and seeking employment. Overall unemployment, and underemployment, remain above their pre-recession levels and without robust growth returning to the economy, the creation of new job opportunities will be limited.
- There has, however, been a substantial drop in youth unemployment from a peak in late 2011 and early 2012.
- The increase in self-employment (now 12% of the workforce in Scotland) has been reflected in a rise in business start-ups. As part of the assessment of the business sector in Scotland, in this State of the Economy, we analyse business start-ups as well as the structure of the business sector in Scotland, recent data on insolvencies and export performance, and investment trends.
Future Prospects – Global Economy
- The global economy is expected to gather momentum through 2013.
- As highlighted in previous State of the Economy publications, there are still a number of challenges over the medium-term, in particular the process of deleveraging in both the private and public sectors. 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.
- Overall, we believe that the extent to which external events will impact confidence in Scotland will be reduced this year. This will be a positive development for the economy and should hopefully improve business and investor confidence and trade.
- Forecasts for global growth in 2013 are still low by historic standards but indicate an improvement on 2012. There is even the possibility for the growth outlook to be revised up as the year progresses. The IMF forecasts growth of 3.5% for the world as a whole, a slight increase from the 3.2% which is the preliminary estimate for 2012.
Future Prospects – Scottish Economy
- 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 – including the deleveraging process, inflation, unemployment and key export market weakness – however, an improving and now more stable 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.