What does the future hold for the Scottish economy?

Scotland’s economic challenges

 Over the last five years (2011-2015) Scotland’s economy has expanded on average by 1.4% compared to 2.1% across the UK.  The most recent results for 2015 showed Scotland’s economy growing at 1.9% compared to the UK’s economy at 2.3% (Table 1).

What might the Scottish economy look like at the end of the new parliamentary ession in five years’ time? Scotland’s small and open economy will be buffeted by global events and it is difficult to predict how economic developments will unfold.

Table 1 summarises independent forecasts for the economies of Scotland and the UK.  Projected changes for the Scottish economy were developed based on these independent forecasts.

Table 1: Forecasts for the UK and Scottish economies

Economy

Forecaster

Outturn

Forecast

2015

2016 2017

2018

Scotland

 

 

Fraser of Allander Institute

1.9%

1.9% 2.2%

EY Scottish ITEM Club

1.9%

1.8% 1.8%

1.8%

PWC

1.9%

1.8%

 UK OBR

2.3%

2.0% 2.2%

2.1%

Source: Fraser of Allander Institute 2016, PWC 2016, EY Scottish ITEM Club 2015, Scottish Government 2016 and ONS 2016 (for 2015 outturn figures)

All three independent forecasters suggest that the Scottish economy will continue to fall just behind UK growth this year (2016).These were made before the most recent estimate of Scottish quarterly GDP was published in April 2016 (Scottish Government 2016).  Latest figures show that for the last nine months the Scottish economy has strayed close to falling into recession.[1]

Challenges of delivering Scotland’s Economic Strategy

The Scottish Government’s Economic Strategy focuses on two objectives – boosting growth and tackling inequality.  The strategy sets out the importance of influencing how the Scottish economy grows as well as how quickly it grows.  Policies to influence the nature of economic growth are set out in terms of inclusive growth, investment, innovation and internationalisation.

Inclusive growth 

Scotland’s Economic Strategy shows that the highest earners in Scotland have seen the largest increases in income in recent years (Scottish Government 2015).  The latest figures show that 19.5% of employees (or around 444,000 people) in Scotland earned less than the living wage in 2015 (Scottish Government 2015).

In Scotland, the latest quarterly national accounts show that, in 2014, wages accounted for 57% of the value added by the economy (excluding taxes and subsidies) (Scottish Government 2016).  This share has fallen from 65% in 2001 and from 71% in 1979 (McGilvray and McNicoll 1984).  The remaining share of the economy is accounted for by Gross Operating Surplus which includes the profits of companies.

Investment 

Investment can cover a broad range of areas including people, infrastructure and businesses.  Capital investment (also known as Gross Capital Formation) has risen in Scotland, but relative to the size of the economy it has remained at similar levels since 1998, even dropping slightly since 2007.  In 1998, just over one fifth (20.2%) of the economy was accounted for by capital investment. By 2014, this had fallen to 18.1%.

Innovation

 One of the challenges facing Scotland lies with R&D, where business expenditure on R&D (BERD) remains low compared to other countries listed in Scotland’s Economic Strategy 2015 (Figure 5).  Higher education research and development (HERD) as a proportion of GDP is higher than in many other countries.

HERD and BERD as a percentage of GDP, 2012

R&D

Source: Scottish Government 2015

Internationalisation

Whilst the cash value of international exports has increased, relative to the size of the overall economy, the value of international exports declined during the early 2000s and has remained stable since.  The latest Exports Statistics Scotland figures shows international exports in 2014 (excluding oil and gas) were £27.5 billion, down from £28.4 billion in 2013.

[1] A recession is defined as two consecutive quarters of negative growth, the most recent quarterly GDP statistics show GDP growth of +0.1% in Q4 2015, -0.1% in Q3 2015, and +0.2% in Q2 2015.

Richard Marsh

Sources:

EY Scottish ITEM Club (2015) Forecast 2016. Available at – http://www.ey.com/Publication/vwLUAssets/EY-Scottish-ITEM-Club-Forecast–2016/$FILE/EY-Scottish-ITEM-Club-Forecast-2016.pdf [Accessed 27 April 2016]

Fraser of Allander Institute (2016) Fraser of Allander Institute Economic Commentary, Vol. 39 No. 3, University of Strathclyde Business School. Available at – https://www.strath.ac.uk/media/departments/economics/fairse/Latest-Fraser-of-Allander-Economic-Commentary.pdf [Accessed 27 April 2016]

McGilvray, J. and McNicoll, I. (1984) Scottish input-output tables for 1979, Quarterly Economic Commentary, 10 (2), p. 85-90. Available at – https://pure.strath.ac.uk/portal/en/publications/scottish-inputoutput-tables-for-1979(7bb4aeda-56a0-4fa6-adc6-0353b351e716)/export.html

Office for Budget Responsibility (2016) Economic and fiscal outlook. Available at – http://cdn.budgetresponsibility.org.uk/March2016EFO.pdf

PWC (2016) UK Economic Outlook. Available at – https://www.pwc.co.uk/assets/pdf/ukeo/uk-economic-outlook-full-report-march-2016.pdf [Accessed 27 April 2016]

Scottish Government (2015) Scotland’s Economic Strategy. Available at – http://www.gov.scot/Resource/0047/00472389.pdf

Scottish Government (2016) Quarterly National Accounts Scotland 2015 Q4. Available at – http://www.gov.scot/Topics/Statistics/Browse/Economy/SNAP/QNAS