Scottish Economy Watch

Scotland's jobs market - February to April 2013

The latest labour market data published today provide further evidence of improvement. Employment rose by 47,000 in February - April compared to the November - January quarter, and unemployment fell by 6,000 to 194,000, a rate of 7.1%. The numbers inactive also fell by 37,000, suggesting that people may be coming back into the labour market.

Over the year, jobs rose by 43,000, unemployment fell by 25,000 but the numbers inactive remained unchanged.

The UK also experienced a rise in employment of 25,000 and a fall in unemployment of 5,000. But the numbers inactive rose by 40,000. Given the relative size of the two economies, the improvement was clearly greater in Scotland in the quarter than the UK.

But as I noted here I suspect that some of the recent stronger jobs and unemployment performance in Scotland could be an unwinding of the effects of the large loss of jobs here between the fourth quarter 2009 and first quarter 2010. GDP performance in Scotland and the UK is very similar, if a little weaker, as shown by the Fraser of Allander Institute's Economic Commentary which we published today - see my blog and here.

The latest figures on employment for Scotland are shown in the chart below

Employment in Scotland in Scotland is now -0.8% below its pre-recession peak. But this is still a weaker performance in the recovery than the UK where jobs are now +0.6% above their pre-recession peak.

We should also note that jobs growth does not necessarily mean a net growth in the demand for labour services. Part-time and self-employment have been rising while full-time employment has been falling. Against this background it is encouraging to see that in the latest release the total number of hours worked in Scotland rose from 77 million to 78 million. And average hours worked rose across all types of employment: full-time, part-time and self-employed. Although, the new data refer to the year Jan 2012 - Dec 2012.

One implication of the large fall in the numbers inactive in the present quarter is that the gap between my estimate of 'real' unemployment and measured unemployment has fallen markedly - see here - as this chart shows.

Finally, the surge in employment in Scotland has improved the employment population ratio as this chart shows:

But even so at -3.5% below the pre-recession peak the size of labour reserves in Scotland, and the extent of human misery at not having a suitable job, clearly still remains large.

FAI Economic Commentary June 2013

The latest economic Commentary from the Fraser of Allander Institute, sponsored by PwC is published today. We have maintained our GDP forecast for 2013 at 0.9%, the same as our March forecast. For the two years 2014 and 2015, we have revised down slightly our forecast for 2014 from 1.7% to 1.6%, and have revised up the forecast for 2015 from 1.9% to 2.1%. The chart below illustrates.

The forecasts reflect the continued weakness of domestic demand, in particular government spending and consumer expenditure, and weak anticipated growth in the rest of the UK and Eurozone markets to which Scottish exports are so reliant.

Clearer signs of a recovery are now emerging within the Scottish economy. But the Institute notes that despite the recent good survey evidence the recovery, so far, is weaker than would be expected 5 years after a recession, even a recession generated by a banking crisis. The reason for this, the Institute argues, is twofold: the UK government's fiscal consolidation programme and a weak export performance reflecting both supply-side structural problems in the UK and Scottish economies as well as weak global demand.

Greater detail is given below

GDP and Output

• The latest Scottish GDP data for the fourth quarter of last year show that Scottish GDP rose by 0.5% in Scotland in the quarter, while falling by -0.3% in the UK.
• After the latest data Scottish GDP stands at -2.3% below its pre-recession peak, slightly better than the position of UK GDP, which continues at -2.9% below its pre-recession peak.
• But once declining oil and gas production is removed - offshore activities are not included in Scottish GDP data but they are in the UK data - we find that Scottish and UK growth is largely identical. Moreover, in 2012 GDP ex oil and gas grew at 0.5% in the UK compared to 0.3% in Scotland.
• By the fourth quarter last year GDP ex oil and gas was -1.9% below its pre-recession peak in the UK compared to -2.4% for Scotland.
• There is evidence of recovery in the business services sector, in particular. By the end of the fourth quarter 2012 GVA in the sector stood 5.1% above its pre-recession peak.
• It is also evident that while real estate activities, accounting for just under 40% of business services, have recovered to stand at around 2.5% above pre-recession peak output, the remaining 60% element of business services - professional, scientific, administrative & support services, has been growing the fastest with GVA reaching nearly 6% above its pre-recession peak by the end of last year.
• Financial services are a cause for concern. GVA in the sector has now fallen more than 17% below its pre-recession peak, a loss of around one sixth of total output in the sector. There seems a strong likelihood that some of this lost output may never return.
• The production sector is buoyant but it would seem largely for one-off technical reasons affecting energy supply.
• Scottish manufacturing GVA now stands at -5.5% below the 2008-09 pre-recession peak. The downturn in the fourth quarter in Scottish manufacturing as well as in UK manufacturing takes some of the shine off the good overall Scottish GDP performance in the fourth quarter.
• This is reflected in the export performance of Scottish manufacturing where exports abroad (ex rUK) fell by 1.4% in the fourth quarter of last year so manufactured exports now stand 13.1% below their pre-recession peak.

Labour Market

• Conditions continue to improve at a faster rate than GDP, suggesting deterioration in productivity.
• In the quarter January to March there was a 54,000 surge in employment in Scotland and unemployment fell to 7.3%.
• But the ratio of employment to population is still -4.3% below its level before the recession. This suggests that the size of labour reserves in Scotland, and the extent of human misery at not having a suitable job, remains large.

Forecasts

• Aggregate data show that with weak export and investment data, there is little evidence of a rebalancing of the Scottish economy away from domestic private and public consumption spending to external private and domestic investment spending.
• Such a rebalancing is seen by many as a pre-requisite for a strong recovery.
• Against this background we have maintained our GDP forecast for 2013 at 0.9%, the same as our March forecast.
• For the two years 2014 and 2015, we have revised down slightly our forecast for 2014 from 1.7% to 1.6%, and have revised up the forecast for 2015 from 1.9% to 2.1%.
• The forecasts reflect the continued weakness of domestic demand, in particular government spending and consumer expenditure, and weak anticipated growth in the rest of the UK and Eurozone markets to which Scottish exports are so reliant.
• Projected net job creation is 12,150 in 2013, rising to 28,200 in 2014 and 38,700 in 2015.
• Unemployment (ILO) is forecast to be 213,250 at the end of 2013, rising to 228,000 by the end of 2014 but then falling back to 189,350 by the end of 2015.

 

Wealth, inequality and tax (sort of!)

Yesterday, 8 June, my son, daughter and I walked down a Byres Road in Glasgow bathed in glorious sunshine. My young son Michael is mad about sports cars and Ferraris. As we ambled along suddenly we saw this beautiful red Ferrari. "Dad take a picture with your 'phone!" Which I duly did. And here it is.

But then I noticed this.

Makes you think.

Friday Music: Sunny Scotland - Brian Cunningham

 

Appropriate on a rare sunny day like today. Filming and original acoustic guitar by BJ Cunningham

More on new Scottish businesses

I published this blog earlier today on the latest data for new businesses in the first quarter this year released by the Committee of Scottish Bankers. Having researched in the area of new firms using VAT registrations I thought I'd look at that data to see if it differed from the Scottish bank account data on new firms.

We can obtain VAT/PAYE new registration data from the Business Demography Release published by ONS. The latest is here.

The VAT/PAYE data are annual and overlap the Scottish Bank data from 2004 to 2011. The chart of the two series is here.

What is interesting about the two series is that they behaved similarly until the trough of the Great Recession but have diverged since. The bank series continued to fall in the subsequent couple of years while the VAT/PAYE series rose.

I have no explanation why the series began to diverge, or as to which series might be considered best. Although my intuition tells me that the VAT/PAYE data may be best. All new businesses seem likely to have a bank account but may be too small in turnover terms to register for VAT or may not have employees. Hence you might expect the number of bank account based new firms to be greater than the VAT/PAYE businesses. This proved to be the case prior to the recession. But not after. So, it seems possible that the bank series could be falling in part because the share of new firms banking with non-Scottish banks, non-bank financial institutions, or using a non-business bank account may be rising.

One alternative possibility is that the VAT registration data is capturing a greater number of new firms because turnover is on average rising faster than the rise in the turnover threshold. Between 2009 and 2011 the VAT registration turnover threshold rose from £67,000 to £73,000. But this was a time of recession and weak recovery so this seems to be an unlikely reason for the measure of new firms to rise.

Whatever the explanation for the divergence between the series, it is worth pointing out that the VAT/PAYE series offers a rosier picture of new businesses in Scotland. It is not so significant to argue that there is a new entrepreneurial 'buzz' in Scotland. But they do show that the share of new businesses in Scotland to the UK has been on a rising trend since 2004 as the chart below shows.

So, some better news on a lovely sunny day!

Little cheer from pickup in new businesses

The data for new businesses in the first quarter this year were released today by the Committee of Scottish Bankers. As I noted in earlier posts e.g. here, this series records new business start-ups based in Scotland that have opened accounts with any of the four Scottish Clearing Banks. It is a valuable series because it should be expected that the creation of new firms would move in line with overall economic performance and GDP in particular.

The chart below incorporates the new data.

The number of new businesses rose from 2,716 in the final quarter of last year to 2,974 in the first quarter of this year. The data are not seasonally adjusted so the red line in the chart takes a four-quarter moving average. The moving average continues to be move down. So the extra firms were not sufficient to buck the downward trend.

In the latest data, the number of starts is 52 percent below the (smoothed) pre-recession peak compared to 47 percent in the fourth quarter. Alternatively, the latest numbers are 42 percent below the average quarterly starts in the period before the recession started, compared to 35 percent in the fourth quarter.

The pickup is welcome. But it is slight.

Let us hope, though, that it is the first sign of a turn around as the economy improves.

Scottish Independence: assessing the case for and against

What conclusions can prospective referendum voters draw on the economic case for and against independence presented by the 'Yes' and 'No' campaigns in the last few weeks?

(I include here the full version of the brief article that appears, along with the views of 4 other economists: Jim & Margaret Cuthbert, David Bell and Jo Armstrong in today's Sunday Herald)

From the Scottish Government we have had the publication of the report of the Fiscal Commission Working Group, including 2 Nobel Prize winners in economics amongst its authors, which set out a possible macro-economic policy framework and policy options in an independent Scotland. This week the Scottish Government published Scotland's Economy: the case for independence, which purported to explain why independence is an essential step in securing a more prosperous and fairer economy.

To be set against this we have had two publications from the UK Government as part of its Scotland Analysis programme. The first covered Currency and Monetary Policy issues in an independent Scotland. The second, published this week, sought to address the position of Financial Services and Banking in an independent Scotland.

As an economist seeking to evaluate these documents, the first conclusion I would draw is that voters should try and read the documents and not rely on the views and opinions expressed about them by the spokespersons for the 'Yes' and 'No' campaigns. And, yes, don't even rely on the views of commentators like myself.

The question that voters want answered on the economy is fairly simple, I think. They want to know will they be better or worse off if Scotland becomes independent. Some more farsighted might also want to know whether their children and grandchildren will be better or worse off. The two questions do not necessarily have the same answers. And both questions, embodying speculation on many future unknowns, are difficult if not impossible to answer with certainty.

So how are the two sides doing?

First, in my opinion, the quality and depth of analysis in the two UK Government papers far exceeds that in the Scottish Government's case for independence paper. We can set aside the report of the Fiscal Commission Working Group because that report, worthy as it is, does not seek to argue the case for an independent Scotland. Rather, it seeks to address the brief: what macro-economic policy framework should be put in place in an independent Scotland?

The two UK Government papers on the economy published so far are well grounded in theory and evidence. Written by civil servants, they are more balanced and objective than the pronouncements of the UK Government politicians and 'No' campaign officials. Both papers make a good case in identifying the risks to the economic well-being of Scots if they choose the independence route. The currency paper does this best because given the Scottish Government's declared option of retaining sterling, the paper very powerfully argues that this would be a second best to the present arrangements within the union. What that paper does less well is make the case that adoption of an independent Scottish currency after independence would necessarily be worse.

Both UK Government papers have to speculate on possible outcomes and it is inevitable that they focus more on worst-case scenarios and ignore the possible up-side. So the financial services paper makes a strong case that an independent Scotland would be in a weaker position to support the financial system given its relative size than is the case in the present UK. But future crises might not emerge and in the event of crisis there might be scope for a Scottish Government to internationalise the problem. I doubt it, but it is possible.

The Scottish Government's paper in contrast has a more difficult task. It chooses not to talk down Scottish industry but at the same time it wants to suggest that performance would be better under independence. So underperformance has to be laid at the door of the union. And policy in an independent Scotland would be more favourable to competitiveness and growth.

It doesn't succeed in doing any of this.

The paper provides stats on Scotland's growth rate over the past 34 years to 2011. Scotland's growth is a little weaker than both the UK and small EU countries. But not by much. At 2.3% annual growth in Scotland between 1977 and 2007 compared to 2.8% growth in the comparator countries, Scottish GDP would have doubled by 2008, while comparator country GDP would have doubled by 2003. Some might query whether that gap is of sufficient size to warrant breaking the UK union.

But, in fact the gap isn't necessarily that large. If the paper had included the available data from the 1960s it would have shown Scotland growing more strongly than the UK and possibly the small EU countries. The choice of start date is therefore spurious and clearly designed to suit the Scottish Government's case.

Even if we accept that Scotland has a growth deficit compared to say the small EU countries does the Scottish government's paper demonstrate the cause? I think any reasonable observer would answer no!

In the paean of praise to Scottish industry there is no mention of historic weaknesses such as a low business birth rate, low business research and development spend, low innovation, low quality investment and adoption of managerial best practices. These problems have bedevilled Scotland's development and enterprise agencies for years. It is difficult to see how such problems can be laid at the door of the UK union, particularly when other non-metropolitan parts of the UK do better on some or all of these indicators.

But even when the paper does focus on perceived deficiencies of the union we are offered largely ad hoc explanations such as no oil fund, credit boom in the 2000s, inequality high in UK, the austerity policy of present UK Government, recent UK cuts in capital spending and so on. There is no systematic explanation of how their perception of weaker Scottish growth over the last 34 years is the fault of the UK union.

Moreover, there is little if anything proposed on the policy programmes that an independent Scottish government would deploy to raise the well being of the Scottish people. Even if independence was necessary for improved well being, which I don't think it is, we are almost asked to believe that it will be sufficient.

The Scottish Government and the 'Yes' campaign can do much better. The UK Government also needs to be more willing to admit there are many unknowns and that independence might offer benefits as well as the costs.

But don't believe me, read the documents yourself.

 

Banks and Scottish Independence, again!

Following some of the comments and responses to yesterday's post on the banks and Scottish independence, I feel I should write some more on the issue.

David Comerford makes the important point that I have ignored the process of 'subsidiarization' of foreign banks. He cites the recent talk in Edinburgh and Research Briefing paper from Angus Armstrong of the National Institute of Social and Economic Research. What Armstrong notes is that the US Federal Reserve and the Bank of England are moving towards ensuring that

Banks operating in the UK market with headquarters outside of the border would be required to be subsidiaries with their own regulatory capital and reserves held at the Bank of England. If this makes resolution easier this may make support for foreign banks (including from an independent Scotland) operating in the UK easier in future.

Subsidiarization will make the provision of liquidity to banks in the rUK from an independent Scotland easier than I allowed in my first post. This is because while liquidity is, in principle, only provided to solvent banks, they may unknowingly be at risk of insolvency. The requirement of subsidiarization with regulatory capital and reserves held at the Bank of England would minimise the risk to the rUK taxpayer and so liquidity support from the Bank is more likely to be forthcoming.

But that says nothing about the provision of both liquidity and bail-out support in the event of insolvency to banks, Scottish and foreign, operating in Scotland.

Armstrong, in the same paper, notes

For a newly independent country with a high debt to GDP ratio the capacity to support the financial system will be limited. ....... To prevent capital flight savers and investors must believe their money will always be safe in an independent Scotland.

To secure this, Armstrong offers three options: a new Central Bank of Scotland; joining the eurozone monetary union; fiscal agreement between the UK and an independent Scotland. But it is clear from his paper that the first two are not politically feasible and bring economic costs. So that leaves us with a fiscal agreement between the UK and an independent Scotland. And that is precisely what I wrote would be required in my first post.

Comerford further suggests in the context of subsidiarization that RBS and Lloyds could capitalise their English operations under English rules. But why would they want to do this if an independent Scotland was as safe to operate as the rest of the UK?

But Comerford is right to suggest in this context that the scale of the activities in the financial services sector need not change with independence. What I and I believe the Treasury paper was concerned about is the loss of some HQ functions and quality jobs rather than wholesale relocations out of Scotland. That would be unlikely.

Finally, Comerford believes that

John Swinney is correct to say that the importance of financial services to the Scottish economy is smaller than its importance to the rUK economy (but specifically the London economy) and to say that the scale of the activities of the financial services sector need not change with independence.

But John Swinney was using the smaller share of financial services in Scottish GVA not to say that the scale of such activities would not change after independence but to imply that the sector is no more at risk than in rUK; that the capacity of an independent Scottish state to support the financial system would be no less than the rUK. The Treasury paper and Armstrong's paper clearly disputes that.

Yes, financial services are much more important to the London economy in GVA terms as well as scale of assets. But no one is suggesting that London is seeking independence. On the other hand with Boris at the helm ....... !

 

Banks and Scottish Independence

The new Scotland Analysis paper on Financial Services and Banking published by the UK Treasury today makes inter alia the point that in an independent Scotland

"The Scottish banking sector would be exceptionally large compared to the size of an independent Scotland's economy, making it more vulnerable to financial shocks than it is as part of the larger UK."

Scotland's Finance Secretary John Swinney's response, to an issue that I have raised in this blog, for example, here, seems to be two-fold.

First, new regulatory provisions since the financial crisis will prevent such crises from happening, as in this quote:

"The Treasury paper seems to be based on a flawed, outdated view of the world which takes no account of the substantial banking reforms which have been ongoing across Europe since 2008."

Secondly, even if such a crisis occurs again financial services are less important to Scotland than they are to the UK as a whole, as in this quote

"Assertions and claims about Scotland's financial sector are entirely misleading - in terms of share of GDP, in fact, financial services are actually smaller for Scotland at 8.3% than the UK at 9.6%. So, if the argument is about risk, then the risk is with the UK."

Both of these responses are facile and in serious error.

While regulatory reform of banking is welcome no one seriously believes that the risks of a serious banking crisis in the future are much reduced. Some such as Andy Haldane of the Bank of England believe progress in this regard will have only been achieved when the size of banks and UK banks in particular is reduced. Others, including this distinguished academic in the field, believe that banking crises are an ever-present risk in capitalist economies.

Secondly, when Andy Haldane talks about size he is not referring to value added but to the size of the assets, or loans and investments, of the bank. As we see in this chart from the new Treasury paper the current size of banking sector assets would be 12.5 times GDP in an independent Scottish state compared to just under 5 times GDP in the whole of the UK.

Implicit in John Swinney's use of the GVA figure is the belief that because the Scottish banks have much of their business located abroad, there would automatically be an international solution if there was a need for a bailout of the 'Scottish' banks. But this flies in the face of the experience in the banking crisis of 2008-09. It is worth recalling Governor of the Bank of England Mervyn King's comment that

"Banks live globally but die locally."

What John Swinney and the 'Yes' campaign need to do is to first of all accept that there would be issues for an independent Scotland given the asset size of its banking sector. Following a serious crisis some international solution could be possible but it will not be automatic as John Swinney seems to imply.

The 'Yes' campaign and the Scottish government need also to address some of the other issues raised by the Treasury report and noted by Robert Peston in his blog today.

First, it is not simply a question of whether the banking sector could be bailed out in the event of bank failure in an independent Scotland. There is also the question of whether banks would have access to sufficient liquidity from the Central Bank if commercial sources of finance dry up as they did following the collapse of Lehman's in September 2008 and the eurozone banking crisis in 2012. This would depend crucially on the currency arrangement adopted by the government of an independent Scotland. And if access to liquidity from the Bank of England is desired then this could only occur if an independent Scotland was a member of a formal sterling currency zone with all that would imply in terms of restrictions on Scottish government fiscal policy and bank regulation.

Moreover, if the financial markets believe that an independent Scottish government will not have as deep pockets, or have access to deep pockets, as the UK government, then they may be more reluctant to lend to the banks, or would charge higher rates. Borrowing costs for the Scottish banks could therefore be higher.

Taking such circumstances together the risk of the two main Scottish banks relocating their headquarters outside Scotland would clearly be high.

John Swinney's glib responses today in no way address any of these issues.

Good news on Scottish jobs, but why?

The latest labour market data published today reveal that conditions in the Scottish labour market continue to improve. In the quarter January to March unemployment fell by just under 7,000 to below the 200,000 mark to 199,000, or a rate of 7.3%. The chart below shows that unemployment is now faring better in Scotland than the UK.

What is striking about these latest jobs market data is the surge in employment in Scotland. Jobs rose by 54,000 in the first quarter of this year compared to a fall of 43,000 in the UK as a whole. This brings Scottish jobs performance since before the recession more into line with the UK as the following chart shows.

Scottish jobs are now -1.3% below their pre-recession peak, whereas in the previous quarter they were more than 3% below the pre-recession peak. This is still worse than the UK, where, despite the loss of jobs in the recent quarter the total is 0.6% above the pre-recession peak.

So what is going on here?

First, we cannot discount the possibility that the Scottish data reflect measurement or sampling error, more so than the UK data where samples are relatively bigger. The latest 'surge' may reflect a correction of earlier errors, or a large error in the latest measurement. Only later data will help clarify that.

Secondly, if we assume no measurement error, the explanation could be as follows.

Since the fourth quarter of 2009 when there was a large loss of jobs in Scotland, the Scottish jobs market has been weaker than the jobs market in the UK as a whole. Yet, GDP growth has been very similar in Scotland and the UK. On the face of it, that meant that productivity worsened more in the UK than Scotland. Again we also cannot discount measurement error affecting the GDP estimates both in Scotland and the UK. There may also be different industrial/structural reasons, including the relative number of 'zombie' firms in Scotland and the UK, which would affect the relation of employment to output in Scotland and UK - I assume that the contribution of such firms to GDP is much less than their contribution to employment, other things equal.

But setting all those possible explanations aside, maybe, just maybe, Scottish employers took a more pessimistic view of the course of the recession and recovery than their UK counterparts. Hence, employment was cut back here but nor in the UK. Now we may be seeing a correction as Scottish employers revise their expectations up considering that conditions are not as bad as they expected. Conversely, UK employers may be in the process of revising their expectations downward: the recovery is not as strong as they anticipated, hence cutback on employment.

Only a theory, but it does reconcile the different Scotland-UK jobs market behaviour with the similar output/GDP behaviour.

What do you think?