State of the economy: March 2017
Report produced tri-annually by the Chief Economist to provide a picture of the Scottish economy in an international context.
Overview
The Scottish economy continued to grow during the second half of 2016, with GDP rising and unemployment falling over the year; reflecting in part the strong fundamentals of Scotland's economy.
As outlined in this report, Scottish productivity has grown strongly in recent years, with the historic gap in productivity performance between Scotland and the UK as a whole now closed. Our analysis shows this has contributed more to Scottish growth whilst UK growth has been driven more strongly by population growth.
The labour market has also remained resilient with employment and unemployment rates continuing to outperform their long run averages, despite the external challenges that have impacted the economy over this period.
Previous analysis has highlighted the impact of low oil prices on the production sector in Scotland, which impacted negatively on investment and employment. New sectoral analysis presented in this report highlights that the slowdown in Scotland's GDP performance since the end of 2014 can be attributed in part to a contraction in the sectors most closely associated with the oil and gas supply chain in Scotland.
Looking forward, whilst conditions remain challenging for North Sea producers, there are indications that companies believe they are approaching the bottom of the cycle, and that business confidence is starting to slowly increase. This may indicate that the sector will see an improved outlook in 2017, which should in turn benefit overall economic growth.
The UK vote to leave the EU and the prospect of commencing exit negotiations in 2017 has been a source of significant uncertainty to the UK and Scottish economy since June 2016. The fall in the value of Sterling has been the most visible impact on the economy to date, helping to boost export orders whilst contributing to the reintroduction of inflationary pressures towards the end of the year as import prices rise.
Business and consumer sentiment in Scotland has been particularly sensitive to information regarding plans to exit the EU. Business sentiment was broadly positive towards the end of 2016, particularly in the manufacturing sector, which is benefitting from an uptick in new orders, supported by the lower value of Sterling.
In contrast, consumer sentiment in Scotland weakened in the second half of 2016, with a net balance of respondents indicating that they believe the economic outlook will worsen over the next twelve months. This is likely to reflect wider concerns about the impact of Brexit on the Scottish economy going forward.
In general, the economic outlook remains weaker on the back of the EU referendum in anticipation that higher uncertainty will start to weigh on business investment, whilst rising inflation will restrict real income growth and consumption. This is reflected in the economic forecasts for both Scotland and the UK in 2017 with growth in both expected to be below their long term average. Scottish Government forecast growth of 1% for Scotland in 2016-17 and 1.3% in 2017-18.
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