State of the economy: January 2018
Report produced tri-annually by the Chief Economic Adviser to provide a picture of the Scottish economy in an international context.
Overview
The forthcoming year will be a pivotal year for the Scottish economy as the outlook improves relative to 2017, reflecting a stronger external environment alongside a more positive outlook for oil and gas and related production activities. The latter should help drive productivity growth as the labour market remains tight. However, risks relating to business and consumer confidence remain, which are impacting expenditure and investment in the economy.
Scotland's economic performance has remained resilient into the second half of 2017 despite challenging economic conditions that continue to be dominated by heightened uncertainty as the UK moves closer to leaving the EU.
Economic growth of 0.2 per cent in quarter 3 for Scotland remains notably below its long run trend rate. However, the strengthening in the economy in the first half of 2017 has continued, albeit at a lower rate. This was supported by growth in the Services sector and a welcome return to growth in the Production sector which continues to be supported in part by the low value of Sterling and the pick-up in economic sentiment in the oil and gas sector.
Scotland's labour market has continued to perform strongly. The unemployment rate at 4.1% remains lower than it did last year and close to record lows while the number of people in employment has risen by 59,000 over the past year with 80% of the increase coming from full time employment. This again indicates a tightening in the labour market across Scotland.
With unemployment close to a record low, opportunities for companies to increase output by recruiting more workers will be more constrained in 2018 than over the last two years. As such, we expect businesses to respond by either increasing hours worked per employee, investing in workplace skills to retain staff or using automation to replace/support labour to increase output. The latter will require business investment which will be influenced by economic confidence over the coming year.
The pick-up in global growth over 2017 alongside the low value of Sterling signals that the international context is more supportive for growth, however domestic pressures remain. On the consumption side, the pick-up in inflation continues to weigh on real wage growth while Scottish consumer sentiment remains subdued and weakened further in the final quarter of the year. Alongside this, while business optimism has broadly recovered from 2016, the outlook for business investment plans remains fragile during this particularly uncertain period. This edition of the State of the Economy presents new analysis of the impact that uncertainty from Brexit could have on business investment in Scotland in the short run.
Weaknesses in business investment activity have short term implications for output growth and the labour market. However, it is the longer term challenges for productivity growth which EU exit continues to pose, particularly if business investment is constrained and if tighter immigration leads to restrictions on skills or inward investment to Scotland.
Therefore, the extent to which positive expectations outweigh uncertainty will be crucial to driving short term output growth, which is reflected in the range of independent growth forecasts for 2018.
Independent forecasts for the Scottish economy present a mixed picture and suggest that GDP for 2017 will range from 0.7% to 1.3%, with slightly higher growth in 2018 of between 0.7% and 1.4%. The range of independent forecasts is notably wider than in recent years, reflecting the uncertainty of post EU access conditions in relation to trade, services, investment and skills.
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