HOW SCOTLAND’S ECONOMY IS FARING

George Kerevan

Last week’s Bank of Scotland Business Monitor contained lots of good news about the Scottish economy. In the three months to the end of February, 41 per cent of surveyed companies increased turnover - a substantial improvement on the same quarter a year ago. Repeat business is high and exports - which had a poor 2013 - also show increasing vitality.

Donald MacRae, chief economist at the Bank of Scotland (with whom I shared a stimulating lunch the other week, hosted by the Norwegian ambassador) sums up the situation: "Expectations for 2014 are at their highest level since mid-2007, suggesting the recovery will continue throughout 2014 and will become increasingly embedded."

Last year Donald got a lot of stick for being optimistic regarding the Scottish economy but the numbers have proved him right. Can it really last? Let’s delve a bit deeper into the latest data on the Scottish economy and work out what is going on.

OUTPUT AND INVESTMENT

The Scottish economy has registered positive growth in each of the last six recorded quarters. Our old friends at the Fraser of Allander Institute have issued a new and higher forecast for Scottish economic growth in 2013. The say growth will come in at 1.7 per cent for last year – spot on the (downward) revised figure for the UK as a whole just issued by the Office for National Statistics. The Ernst & Young ITEM Club forecast for Scottish growth in 2013 (published last December) is even higher, at 1.9 per cent.

For 2014, Fraser of Allander has just revised up its forecast of Scottish growth from the 1.8 per cent predicted in October to a very healthy 2.3 per cent. The (earlier) ITEM forecast for 2014 is 1.7 per cent but expect that to go up. The Office of Budget Responsibility recently hiked up its UK growth forecast to a stunning 2.7 per cent.

But we are still living in the shadow of the great 2008-09 recession. In the third quarter of 2013 (the latest for which we have numbers) Scottish GDP was still 0.9 per cent below the pre-recession peak. However, that’s a bit better than for the UK, where GDP stood at 1.9 per cent below the peak.

With the current spurt of growth, UK output is slated to reach its pre-recession high sometime later this year. But the ITEM Club thinks Scotland has already recovered its previous peak. From the Q3 2013 data we possess, we know the service sector in Scotland is already 2.2 per cent above its pre-recession peak – a better figure than for the whole UK service sector.

RETAIL SALES

Retail sales in Scotland increased by 1.1 per cent in volume terms during the fourth quarter of 2013. On an annualised basis, retail sales volumes grew by 4.0 per cent. That’s even a wee bit better than the GB situation, where retail sales increased by 0.8 per cent in volume during the fourth quarter, and by 3.7 per cent annually. Verdict: Scots are certainly taking part in the UK consumer boom.

However, if we look at the value of Scottish retail sales (without adjusting for inflation) the fourth quarter saw an increase of 0.9 per cent and 4.6 per cent annually. But the value of GB retail sales was up by 1.0 per cent in Q4, or 4.9 per cent annually. Both sets of data taken together suggest that Scots are buying more but cheaper goods. This may reflect a number of things: native canniness, a poorer income distribution in Scotland, and a weaker housing market.

Nevertheless, consumer spending is accelerating north of the border. Household final consumption expenditure increased by fully 2.0 per cent during the third quarter of 2013, according to Scottish Government data. The level of household expenditure is now a significant 5.3 per cent higher (£1,044m) than in 2012 Q3. How is this spending being financed?

EXPORTS

On the export front, the latest figures we have are from Q3 last year – very long whiskers indeed. The official index of manufactured exports for July to September 2013 registered a real fall of 2.2 per cent (in volume terms) from the previous quarter. This followed a rise of 3.3 per cent in the second quarter.

In itself, this volatile pattern is not a problem because exports sales can be very lumpy and seasonal. However the 2013 Q3 export volumes are still 10 per cent below their peak in Q3 2008. This is worrying because it means there has been relatively little recovery in volume exports since the crash. Indeed, on a rolling-annual basis, comparing the most recent four quarters to the previous four, manufactured exports actually contracted by 0.9 points.

The big problem I can see is that the pound has been rocketing in value since the turn of the year, raising export prices and adding to the UK’s near record trade deficit. True, even if volume exports remain broadly static, the rise in sterling boosts export earnings. Indeed, there was a reasonable 6 per cent rise in export earnings (including services) in 2012. However, unless we grow export volumes – especially in high-value manufacturing – then Scotland’s economic recovery remains fragile.

THE LABOUR MARKET

The number of people working for Scottish companies is rising at its fastest rate for 16 years, according to the Bank of Scotland. A recent banks survey showed the steepest rise in private employment in the report's history. Recruitment in the housing and service industries was particularly strong.

Figures from the Office of National Statistics confirm the upturn in the labour market. Over the past year the Scottish employment rate has increased by a full 2 percentage points - larger than the 0.3 percentage point increase seen in England. Scotland now has the highest employment rate of the four UK nations. Scotland gained 79,000 new jobs in the year to January.

There are a few caveats, though. Employment data is often crude and unreliable. Certainly, employment is on the up, and that is good. But the number of part-time and temporary worker remains very high, suggesting low earnings. There also seems to have been a big loss of employment among men aged 35-49 in the middle of last year – around 20,000 of them. I’m not sure if they are going to get re-absorbed into the workforce easily.

At the same time, the latest FSB survey reveals that some 27 per cent of Scottish businesses see a lack of access to skilled staff as a significant barrier to growth. This is having a knock-on effect on wage costs.

Altogether, the data suggests a possible tightening of the Scottish labour market and a constraint on growth over the next 12 months.

THE SME SECTOR

The general improvement in the Scottish economy is also reaching the SME sector. Last month a report from the Federation of Small Businesses (FSB) showed SME confidence in Scotland had finally match the UK average, and was at its highest rate since 2010. As a result, more than half of all Scottish SMEs have plans to expand - with 27 per cent aiming to increase capital investment, while 7 per cent plan to increase staff numbers.

As ever, the big constraint on SMEs is working capital. One reason for the improved situation regards small firms in Scotland, apart from the general expansion of the economy, may be an easing in the availability of credit. The FSB reports that around 13 per cent of small businesses say credit availability is good or very good, compared with half that number a year ago. But that still leaves the banks with a lot of dissatisfied customers. And when will interest rates rise?

THE REFERENDUM

There will be much huffing and puffing between now and September 18 regarding the impact of potential independence on Scottish business. But if the recovery is anything to go by, Scottish business is getting on with the job and will cope - whatever the outcome.

Dear Scotland: An Open Letter From Your Canadian Cousins

From the Toronto Globe and Mail

Dear Scotland,

You probably don’t know this, but you made us. The first European to cross the continent and reach our Pacific coast was Alexander Mackenzie – a Scot.

Our first prime minister and chief Father of Confederation, Sir John A. Macdonald? Scottish. So too our second PM.

Our country’s national dream, a railroad from sea to sea, was realized in 1885 when Sir Donald Smith, head of the Canadian Pacific Railway, drove The Last Spike at Craigellachie – a place named after a village in his homeland.

The man who did the most to create Canada’s system of universal public health care, and chosen as “The Greatest Canadian” in a national survey of CBC viewers, was Tommy Douglas. He was born in Falkirk.

The thistle and the red lion rampant on our national coat of arms identify you as one of our four founding nations; half of our provincial flags contain a Saint Andrew’s cross; and one of our provinces – Nova Scotia – is named after you.

There are said to be more pipers and pipe bands in Canada than in Scotland. And nearly five million Canadians identify their ethnic origin as entirely or partly Scottish, which means we have almost as many Scottish-Canadians as you have people.

You made us – and as a gesture of thanks, we’d like to offer some advice on how to avoid unmaking yourself.

This bit of history you are living right now? This referendum thing? We’ve already been through that. We may be a young nation but we have far more experience than you on this issue. We nearly tore our country apart. Twice.

The independence side in your referendum campaign is to be commended for a few things. There’s no ethnic nationalism at the heart of the Yes movement, and that is no small accomplishment. And the question to be asked on the 18th of September – “Should Scotland be an independent country? – sounds remarkably clear and simple. The Quebec independence movement never dared ask anything so straightforward, because outright independence has never been favoured by anything close to a majority of the Quebec population.

Compare your question with the one asked of Quebeckers in 1980: “The Government of Quebec has made public its proposal to negotiate a new agreement with the rest of Canada, based on the equality of nations; this agreement would enable Quebec to acquire the exclusive power to make its laws, levy its taxes and establish relations abroad – in other words, sovereignty – and at the same time to maintain with Canada an economic association including a common currency; any change in political status resulting from these negotiations will only be implemented with popular approval through another referendum; on these terms, do you give the Government of Quebec the mandate to negotiate the proposed agreement between Quebec and Canada?”

The Scottish question is shorter and simpler. But is it really clearer? It has not escaped the notice of us, your cousins from across the seas, that much of the case made by the Scottish Yes campaign is neatly described by our fuzzy 1980 question.

“Sovereignty” but maintaining “an economic association”? Check.

A new country, but also a plan to “negotiate a new agreement” with the old nation? Check.

A Yes vote portrayed as promising co-operation rather than a severing of ties? Check.

And the idea that you can leave but keep the currency? Sorry, we’ve heard this song before.

The Yes campaign in Scotland, as reasonable as it imagines itself, seems to believe in the unreasonable proposition that you can improve your marriage by getting a divorce. It doesn’t work that way.

The Yes campaign also promises that post-divorce negotiations will take place in an atmosphere of complete calm and rationality – and that rump Britain will give it what it wants.

But that glosses over the fact that the other side has demands, too. Scottish First Minister Alex Salmond said recently that, if Britain didn’t let an independent Scotland continue to use the pound, Scotland might refuse to assume its share of the national debt.

Mr. Salmond has the greatest interest in maintaining the fiction that normalcy will reign and reason will rule in the event of a Yes victory – and yet the mere mention of a hypothetical negotiation has even him testily making threats.

How well do you think it will go if things move beyond the hypothetical?

Having looked over the edge of the precipice that you are marching up to, and having dipped our toe into the volcano more than once, we can tell you: It will not go well at all.

There is an alternative to independence: federalism. It’s something we’ve been practising and perfecting for a century and a half. You’ve been at it for a decade and a half. Give it time. We’re not sure if the “Devo Max” plans to devolve nearly complete responsibility for taxation to the Scottish Parliament, plans being floated by the British government in the final days of a referendum, are necessarily the way to go. But some devolution of taxing authority can take place.

The Scottish Parliament has little power to raise its own revenues – whereas Canadian provinces have a full range of taxation and spending powers. That’s federalism. That’s how strong subnational and national governments can coexist.

Once upon a time in Quebec, the independence option was the choice of the young, as it is in Scotland. That time has passed; most young Quebeckers today do not imagine that their very real economic and social challenges will be addressed by drawing a new border. But it took us a half-century to get to this point. The same can happen for you, too.

So, dear cousins from beyond the seas, here is our advice and our plea: Stay in the United Kingdom. Let time pass and passions subside. Make changes happen, but within the U.K. And meet us back here in, say, 2040. You can take the U.K. apart then, if you still want to. We think you will not. And we know this: If you take it apart now, you can never, ever put it back together again.

This article was published in the Toronto Globe & Mail on Friday, September. 12.

BUSINESS GROWTH BOOM DOWN SOUTH

Businesses in England last month enjoyed the fastest rate of growth in a quarter, according to the Lloyds Bank Regional Purchasing Managers’ Index.

“Business conditions have continued to strengthen throughout the summer, and companies across England and Wales have been taking advantage of a more supportive economic climate, underpinned by improving demand,” said Tim Hinton, managing director, SME and mid-markets banking, at Lloyds Banking Group.

“Job creation continued to grow robustly in August, highlighting increasing confidence among businesses that rising workloads and greater customer spending patterns will be sustained over the longer term.”

Roland Gribben, veteran business correspondent for the Daily Telegraph, reports the North West was the strongest performer, followed by Yorkshire, Humberside and the North East. Businesses in the East of England also enjoyed a surge in activity, with the fastest rate of growth in the 17 years that Lloyds Bank has produced the survey.

Across the English regions, the seasonally-adjusted index measuring overall business activity rose to 59.4 in August, up from 59.3 in July. This remained well above the 50.0 no-change value and was the steepest expansion in business activity for three months, according to the bank.

Net job creation in the private sector showed continued growth, except in the North East, which continues to lag behind in terms of overall business activity and growth.

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