September 2016 Nowcasts


Grant Allan & Stuart McIntyre, Fraser of Allander Institute, Department of Economics, University of Strathclyde

We have crunched the numbers on the data on the performance of the different components of the UK and Scottish economies released during August, and we’re got some results to share in terms of what this suggests about Scottish economic growth in the second and third quarters of 2016.

To briefly recap, in our nowcasting work we have been producing monthly estimates of the current growth rate in the Scottish economy for nearly two years now. While experience suggests that our nowcasting models have tended to overestimate Scottish GDP growth, two features of our results are important. First, we have seen that with each revision to official statistics – as a result of more data becoming available – the official estimate has got closer to our nowcast results. Second, while we tend to overestimate the level of GDP growth, we have generally been good at estimating its direction.

What are this month’s results?

For 2016 Q2 we are estimating GDP growth at 0.26% which, at an annual rate, is 1.01%. This is down from our last nowcast in early August which put growth in 2016 Q2 at 1.17%.

Note that we do not explicitly model the electricity sector within our nowcasting model, and therefore we will not capture the impact of the closure of Longannet in our Q2 nowcasts. Given the expected scale of this loss to GDP, estimated to be around 0.3-0.4% of GDP, our nowcasts suggest that the Scottish economy may well have contracted during Q2.

For the current quarter – 2016 Q3 – we estimate GDP growth to be 0.31% which, at an annual rate, is 1.25%.  Again, this is down from the last nowcast estimate of 1.51%.

The indication from measures like PMI were that economic activity in July was down significantly across all regions of the UK following the UK decision to leave the EU, albeit more recent PMI data have shown some improvement; notably yesterday’s Services PMI data. Given the extent of Scottish trade with the rest of the UK, strong economic performance in the rest of the UK is important in driving growth in Scotland.

What does this mean?

First, it is clear that economic growth in Scotland continues to diverge from growth in the rest of the UK. Q2 growth in the UK was estimated at 0.6%, compared to our nowcast of 0.26%. Taking into account the tendency of our model to overestimate GDP growth and the closure of Longannet, our results would suggest that it is highly likely that the Scottish economy contracted in 2016 Q2. The closure of Lonagnnet is a ‘one-off’ statistical hit to Scottish GDP, and should be interpreted as such, so we should avoid jumping too early to a conclusion that “Scotland is in recession”.

Second, it is clear that Scotland has now been deviating from its long-run growth rate for a considerable period of time now.

Third, with the devolution of significant tax powers to the Scottish Parliament how the Scottish economy is performing will have a much greater bearing on Scottish budgets. The report we release next week on the Scottish Government Budget will explain and explore these issues in more detail.

Fourth and finally, the ongoing challenges facing the oil and gas sector show no sign of abating. This has had a sustained impact on the onshore economy of the north-east, but through the supply chain of the sector it has also impacted on activity across Scotland.

 Looking forward

The rest of 2016 looks like it will be a difficult period for the Scottish economy. In addition to the challenges in the oil and gas sector, continued uncertainty surrounding Scotland’s membership of the European Union might be expected to act as a drag on economic activity. The Scottish Government ‘Programme for Government’ was unveiled this week and we will pick up on this and the wider economic outlook next week when we release our Scottish Budget Report.

August 2016 Nowcasts

Following the release of the Fraser Commentary last week, today we release the results of our latest nowcasts of the Scottish economy. These are the first to incorporate data on economic activity in June into our estimates, and thus do capture the first week after the Brexit vote. We have also produced our first estimate for Q3 (Jul-Sept), although the nowcast next month will be the first to include data on activity in Q3 itself, and so at this stage we can think of these as estimates based on previous activity and estimates.

Headlines:

  • 2016 Q2 nowcast is 0.29% which, at an annual rate, is 1.17%. This is down on our last nowcast.
  • 2016 Q3 is 0.38% which, at an annual rate, is 1.51%.

In terms of what these suggest about current Scottish growth, three things are worth reiterating.

Firstly, with the closure of Longannet Power station on March 24th 2016, we are expecting Scottish GDP to take a one-time hit. We do not capture electricity generation within our nowcasting model, and so we will not be picking this up in our estimates. Nevertheless, as we suggested here, we expect this one-time event to reduce GDP by up to 0.4% in Q2. What this means is that to avoid a contraction in the Scottish economy the rest of the economy would have to be growing by more than 0.4%.

We are not seeing any evidence of this in our results, indeed our Q2 nowcast (0.29%) is significantly below rate that would be required to avert a contraction in Q2. We have said before that one shouldn’t be overly concerned from an economic perspective about a one—off change in GDP resulting from the closure of Longannet, this represents a ‘levels’ change rather than a fundamental contraction in the Scottish economy.

Secondly, we are continuing to see significant underperformance in the Scottish economy relative to the rest of the UK and also relative to Scotland’s own long—term growth rate. The UK economy as a whole is at or above trend growth rates, and has been for some time. This is not true of Scotland. The Fraser Commentary released last week made clear that there are challenges requiring a robust policy response from both the Scottish and UK Government. What needs to be done by each, are perhaps worth reiterating in full here:

  1. “…the Bank of England and HM Treasury will be required to step forward with an immediate stimulus to counterbalance the headwinds created by both the economic and policy uncertainty and the financial market volatility.”
  1. “…the UK Government has to set out its clear intentions and realistic objectives for the negotiation process. If businesses and investors can be reassured that the mechanisms and processes to negotiate the UK’s exit from the EU are sound and that the overall approach will be to preserve close economic linkages with Europe, this will go a long way to reducing some of the uncertainties.”
  1. “…in time the Scottish Government will need to clarify its own plans for the constitution to avoid adding to the existing uncertainty. At the same time, it must review its domestic policies for growth in the light of the referendum outcome, including any stimulus measures of their own (e.g. re-profiling infrastructure projects).”

Thirdly, the first official statistics on growth in 2016 Q1 were released this month. We blogged about these, including the nature of recent revisions, here. We have been clear that our nowcasting model tends to overestimate economic performance, and thus in interpreting the results we have to bear this in mind. Nevertheless, as we showed here, recent revisions to Scottish GDP have moved the official data closer to our nowcast estimates.

That the Scottish economy is struggling is not news, and hasn’t been for over a year now. That it continues to consistently underperform the UK economy, and has been diverging in recent quarters, is a real worry. The headwinds of the Brexit fallout are still to hit the rest of the UK economy, but hit they will. As the major market for Scottish exports, what happens in the rest of the UK will impact on Scotland’s economy, while future negotiations between the UK and the European Union will shape Scotland and the UK’s short- and long-term economic future.

For details of how the data mentioned above, and other “live” data on Scottish economic activity are used to construct our “nowcasts”, see the Methodology page.


[1] Note as explained in the methodological paper (here), we nowcast gross value added (GVA) rather than gross domestic product (GDP), because this is the regional equivalent of GDP which is produced, but we refer here to GDP for intuitive ease.

cropped-fai-logo-e14671945886861

July 2016 Nowcasts

Today (29th June 2016) we release our latest series of nowcasts of the Scottish economy; these are our final estimate of growth in 2016 Q1 and our latest estimate for 2016 Q2 [1].

Headlines:

  • 2016 Q1 GDP growth in Scotland, at an annualised rate, is nowcast to be 1.28%, the quarterly change is nowcast to be 0.32%
  • 2016 Q2 GDP growth in Scotland, at an annualised rate, is nowcast to be 1.52%, the quarterly change is nowcast to be 0.38%

These nowcasts represent a slight upward revision to our nowcasts for 2016 Q1 and Q2.

Despite including data made available during June 2016, these nowcasts are produced using data relating to the economy prior to the EU Referendum result. Thus, while for continuity we release these nowcasts, our expectation is that our future nowcasts, and indeed realisations of Scottish and UK GDP, for 2016 will be lower than those forecast prior to the result of the EU referendum result.

It is likely that the significant uncertainty evident since the announcement of the referendum result will have a negative effect in the short run as business and consumer confidence weakens leading to possible investment decisions either being delayed or cancelled. The increased uncertainty will likely act as a drag on inward investment, and potentially a stalling of other investment decisions, until after the uncertainty about the UK’s position with regards to its future trading arrangement with the EU and other markets is resolved.

That being said, no change to the UK and Scotland’s trading arrangements or labour market status will be confirmed, according to the UK Government, for some time (over two years by some estimates), although continued uncertainty about the future shape that these will take will raise significant challenges for the Scottish and UK economies as the unprecedented process of leaving the EU proceeds in the coming weeks and month.

Against this, the abrupt and sharp weakening of the pound against major currencies seen since the result was announced could make Scottish products more competitive overseas. But previous such periods suggest that there is a question over the price-responsiveness of Scottish exports (and Scotland’s major export markets are seeing their own forecasts revised down). Further, Scottish firms and consumers will see prices rise for imported goods, as these become relatively more expensive.

For details of how the data mentioned above, and other “live” data on Scottish economic activity are used to construct our “nowcasts”, see the Methodology page.


[1] Note as explained in the methodological paper (here), we nowcast gross value added (GVA) rather than gross domestic product (GDP), because this is the regional equivalent of GDP which is produced, but we refer here to GDP for intuitive ease.

June 2016 Nowcasts

Today (2nd June 2016) we release our latest series of nowcasts of the Scottish economy; these are our final estimate of growth in 2016 Q1 and our new estimate for 2016 Q2 [1].

Headlines:

2016 Q1 GDP growth in Scotland, at an annualised rate, is nowcast to be 1.01%, the quarterly change is nowcast to be 0.28%

2016 Q2 GDP growth in Scotland, at an annualised rate, is nowcast to be 1.44%, the quarterly change is nowcast to be 0.36%

These nowcasts represent a continued downward revision for 2016 Q1 and Q2.

Official estimates for Q1 2016 are due to be released next month, and will be incorporated into our next nowcast release.

We will be commenting more in the coming month on the current state of the Scottish economy, but for now we simply reiterate our concern that the Scottish economy is struggling, both in relative (to the UK) and absolute terms. Action to address this current malaise is urgently required.

For details of how the data mentioned above, and other “live” data on Scottish economic activity are used to construct our “nowcasts”, see the Methodology page.

[1] Note as explained in the methodological paper (here), we nowcast gross value added (GVA) rather than gross domestic product (GDP), because this is the regional equivalent of GDP which is produced, but we refer here to GDP for intuitive ease.