State of the economy: October 2018

Overview

The Scottish economy has continued to strengthen in the first half of 2018.

In Q2 2018, Scotland’s annual GDP growth was the strongest it’s been since 2014 and outpaced growth in the UK as a whole. The expansion over the quarter was seen across all sectors with positive growth in services, construction and production.

The stronger growth in recent quarters has been driven by a number of factors. Firstly, exports have grown strongly on the back of the weaker value of Sterling and stronger global growth. Recent HMRC data shows that Scottish exports of goods grew 7% in cash terms over the past year. Whilst this is due in part to the rising value of oil exports, onshore goods exports also grew by 6% over the same period. Secondly, the stronger outlook for the oil and gas sector alongside the notable rise in the oil price has provided a boost to confidence and activity through its supply chain and in the wider economy.

The stronger output performance has also been reflected in Scotland’s labour market with the latest data showing that unemployment remains close to record lows coupled with high levels of employment. Collectively, this demonstrates a continued tightness in the labour market which should drive up wage growth as firms compete to retain and recruit staff.

As noted in previous reports, uncertainty relating to the form and timing of agreement for EU exit remains a key concern for many sectors of the economy and goods and services sectors will be impacted in different ways. This report sets out several channels through which uncertainty will impact on the economy. Businesses may delay or defer decisions on new investment and consumers reduce or postpone spending. At the same time, the nature of investment may change as firms’ seek to bring forward investment to protect supply chains and identify alternative routes to service customers and key markets.

Combined, the impact is likely to manifest itself in more volatility in economic data. As noted previously, building stock inventories in advance of March 2019 may bring forward economic activity to this side of EU exit. Our new analysis suggests that while this could potentially boost Scottish GDP growth in 2018-19 by up to 0.4 percentage points, this would be more than offset by a slowing of output in subsequent quarters. The overall effect of stockpiling on the economy is negative in the medium term.

At this time, it remains unclear the extent to which any UK agreement, if achieved, will enable an orderly transition. The latter is crucial for expectations, particularly for households and consumer confidence. New analysis in this report shows that overall consumer sentiment has been negative since the EU referendum and remained negative in Q3 2018. Despite sentiment regarding individual household finances strengthening, attitudes to spending remain weak and households’ expect the economy to deteriorate over the next year. Therefore a broader Brexit risk remains, which if transmitted into a significant fall in household confidence and consumption, could have a material impact on the economy.

Finally, the Scottish economy has grown consecutively for six quarters, with growth strengthening in 2018. Independent forecasts for the economy are reflecting this improved outlook with Brexit remaining the main risk.