Scotland in the Global Economy

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Scotland in the Global Economy

• David Fenton Stephen Boyle

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What you can expect from us this morning
Life beyond the recession back to business as
usual?
The Great Recession by numbers whats happened?
Two challenges for Scotland economic growth
the public finances
What next?
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Scotland in the Global Economy

• The Great Recession by numbers

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The Great Recession by numbers GDP
Peak-to-trough decline in GDP

• National income down 5.6 over the 1½ year to Q2
  2009.
• Twice as bad as the early 1990s on a par with
  the 1980s.
• More positively, overwhelming majority of
  economic activity continued despite the worst
  ever financial shock.

Source Datastream
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The Great Recession by numbers asset prices
Property prices (Jan 2000100)

• Large, long increase in house prices.
  Peak-to-trough decline of 19, with rally over
  late-spring/summer
• Commercial property values down by 44. Tentative
  signs of stabilisation around 1997 levels.
• FTSE all-share fell 44, but has also rallied,
  rising 22 from trough in February. Still down by
  32

Source Datastream
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The Great Recession by numbers Scotland
Growth in GVA (y/y)

• First recession for almost 30 years the worst
  since records began in 1963.
• Similar depth to UK its not usually like that
• Broad-based, but 3 sectors stand out
  construction manufacturing and business
  services finance.

Source Scottish Government
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The Great Recession by numbers global
Cumulative fall in GDP/GVA (y/y)

• UK and Scotland have fared better than some,
  worse than others.
• Generally speaking, the thriftier nations have
  endured a deeper recession (Germany Japan).
• Has mainland Europe already turned the corner?
  What about the UK?

Source Datastream and Scottish Government. Up to
Q2 2009,, except (Q1)
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Scotland in the Global Economy

• What next?

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Why forecasting is risky, especially now
Consensus forecasts of G7 GDP growth in 2009 made
in August 2008
Source Consensus Economics
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Why forecasting is risky, especially now
Consensus forecasts of G7 GDP growth in 2009 made
in August 2008 actual H1 data
Source Consensus Economics
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Is the UK at a turning point?
of companies saying that, compared to a month
ago, business levels are...
Service sector
Manufacturing sector
Source Markit Economics
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Is Scotland at a turning point?
Higher output
Lower output
Source Markit Economics
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UK economy indebtedness
Debt-to-GDP ratio
140
120
100
80
60
40
20
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Households (secured)
Households (consumer credit)
Companies
Source Datastream
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Household deleveraging
Save
Income
Spend
LR AVERAGE
4
96
Q1 2008
105
-5
FUTURE?
92
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Source Datastream and RBS calcs
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Implications for the economic outlook

• Over the next 3 years we are set to save more and
  spend less.
• Recovery likely to be more subdued than past
  experience.
• Risk of a double dip casts a sizeable shadow.
• Exports will have to be higher, or income will
  have to be lower still.

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Scotland in the Global Economy

• Life beyond the recession

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Key questions

• Will we see deflation?
• Or will inflation return to haunt us?
• What is the outlook for the public finances?
• Unemployment Ashes to Ashes?

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Indebtedness at a 33-year high
UK public sector net-debt-to-GDP ratio ()
60
50
40
30
20
10
0
1974-75
1976-77
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
Total
Excl financial sector interventions
Source ONS
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This could get expensive
Net present value of impact on fiscal deficit of
crisis and age-related spending to 2050
For every 1 the UK spends on the crisis, it will
spend 12 on ageing-related costs
Source IMF
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A growing burden on fewer shoulders
Number of Scottish men and women of working age
(20-64) per person aged 65 or above
2
1
0
2006
2016
2026
2036
Source GAD
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Below trend growth means unemployment keeps rising
Divergence of growth from trend change in
unemployment
Source Datastream
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Below trend growth means unemployment keeps rising
Divergence of growth from trend change in
unemployment
Source Datastream
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Scotland in the Global Economy

• Two challenges for Scotland

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We are a mid-table performer
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How to decide what to do?

• Whats your view about what makes economies grow?
• Growth of the labour force
• Productivity growth

• What makes productivity grow? A mix of
• Macroeconomic conditions especially stability
• Enterprise business start-ups and failures,
  business churn
• Labour force number quality of people
• Physical capital infrastructure, machinery,
  buildings
• Competition more is generally better
• Innovation inventing or adopting

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Labour force benefits of early intervention
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Scotlands public finance challenge

• Put bluntly, it is unlikely that there will be
  any real increase in the resources to support
  Scottish Government spending programmes over the
  next five years,
• Professor David Bell, report for Scottish
  Parliament Finance Committee
• The Scottish Government now faces unprecedented
  change in relation to its budgetary future. Such
  a future may therefore require previously
  unprecedented changes in policy thinking and
  funding arrangements in order to steer a way
  through ...
• Professor Richard Harris, Centre for Public
  Policy and the Regions

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How do we meet the challenge?

• David Bells paper identifies these options
• Withdraw service provision stop doing things
• Increased rationing less provision to fewer
  people
• Charge for services prescriptions, transport,
  care for the elderly, education?
• Raise taxes Scottish Variable Rate The
  Tartan Tax
• Cut costs wages are approximately 60 of the
  Scottish Governments costs
• CPPRs emphasis is on the process of
  prioritisation
• Creation of a Scottish Treasury function
• Emphasis on generating using evidence, e.g.
  monitoring evaluation
• Two issues for you for the rest of this week
• How would you determine priorities?
• What decisions would you reach

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Scotland in the Global Economy

• Any other questions?

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