State of the Economy: June 2018

Overview

The latest economic data show that the Scottish economy strengthened in 2017 and growth continued into the first quarter of 2018. The outlook for the economy remains positive but there remains a number of Brexit related risks which are impacting on business confidence and investment.

At a time when global growth is forecast at close to 4 per cent in 2018 and 2019, with Sterling continuing to trade below levels in recent years, growth in the UK and Scotland remain muted in comparison.

For Scotland, the rebound in North Sea output, profitability and confidence, following a difficult three year period should support stronger growth in that sector and Scotland this year and beyond. The recent GDP data indicates strengthening in production (and manufacturing) related activities in Scotland, which is positive. Similarly, growth in services remains close to trend, reflecting the strong labour market in Scotland, which has seen unemployment remain close to record lows at just over 4 per cent and employment growth and inactivity both continuing to strengthen.

However, construction activity has continued to contract in the first quarter of 2018, which is the latest in a series of quarterly declines. The adverse weather is likely to have had a temporary impact on output from the sector in Scotland and across the UK as a whole at the start of the year. However, the longer term adjustment back to more normal levels of output following exceptionally fast growth in 2015, alongside recent construction firm closures, suggests this remains a difficult period for this sector. The most recent business survey evidence does however suggest positive activity in the sector alongside a pick-up in business confidence.

In the previous State of Economy, I highlighted the potential impact of weaker investment on output growth throughout 2018 and 2019 related to Brexit and the consequences of lower migration on a tightening labour market for recruitment. On Brexit, as uncertainty remains in relation to post exit transition plans, we may see increased volatility in economic data as firms bring forward activity, such as stock purchases, to hedge against disruptions in supply lines or invest to consolidate their supplies. Similarly, on recruitment we are seeing evidence of upward pressure on wages which will help household incomes.

Finally, the independent growth forecasts for Scotland remain muted at between 0.7 and 1.3 per cent in 2018 with slighter stronger growth forecast in 2019. The current range reflects the uncertainty at this time, while the longer term challenges, which are affecting many advanced economies, of weak productivity growth and slow population growth remain important for Scotland.

However, recent trends in exports and inward investment to Scotland, coupled with strong labour market performance continue to demonstrate the underlying resilience of Scotland's economy.