Grant Allan & Stuart McIntyre
Fraser of Allander Institute, University of Strathclyde
In this blog we provide an update from our nowcasting model of the Scottish economy. This includes an updated estimate for Q3 of 2017 alongside our first nowcast for 2017 Q4.
Our model estimates:
- GVA growth in 2017 Q3 is 0.32% which, at an annual rate, is 1.28%. On a quarterly growth basis, this is down over percentage points on our estimate of growth in Q3 from last month.
- GVA growth in 2017 Q4 is 0.34% which, at an annual rate, is 1.37%
Our nowcast model results are summarised over time in the figure below. The period of relatively flat growth through much of 2016 is clearly evident. As we have observed before, our model tends to produce estimates which are less volatile than the first release of GVA but which capture the trend rather well as the figure below illustrates.
Economic growth in Scotland has been sluggish for some time, reflected in the official data and in our nowcast estimates; this makes the downward revision to our estimate for 2017 Q3 this quarter (of 0.1 percentage points; from 0.43% last month to 0.32% this month) a particular concern.
This downward revision is driven by the continued weakness of a range of indicators of the health of the Scottish economy. While the labour market remains robust, elsewhere in the economy there are signs of substantial weakening. Not least in retail sales where growth was flat in the third quarter of 2017 was flat (0.0% growth). Other indicators of economic activity, such as business investment, are a further cause for concern for the short-term outlook for Scottish growth.
The next Fraser Economic Commentary will be published in December, and we will delve into these trends in more detail there.
Slightly later than usual, we release our August nowcast results. These are our latest estimates of economic growth in Scotland in Q2 and Q3 of 2017, and show:
GVA growth in 2017 Q2 is estimated to be 0.49% which, at an annual rate, is 1.98%
GVA growth in 2017 Q3 is estimated to be 0.40% which, at an annual rate, is 1.62%
After surprisingly rapid growth of 0.8% in Q1 in Scotland, our nowcast estimates suggest slower growth in Q2 and Q3.
The latest Fraser Economic Commentary highlighted the challenges still facing the Scottish economy and we would reemphasise those. In addition, we note that the UK economy –which had a surprisingly strong 2016- has weakened in recent quarters. This will have an implication for Scottish trade with the rest of the UK and may therefore dampen growth in Scotland through 2017.
This blog provides the June 2017 update from our nowcasting model for Scotland.
- Our nowcast for GVA growth in 2017 Q1 is 0.22% which, at an annual rate, is 0.87%
- Our nowcast for GVA growth in 2017 Q2 is 0.23% which, at an annual rate, is 0.94%
These results represent a downward revision relative to last months update. In the context of weak economic performance over recent quarters, this suggests that there is little reason to be optimistic about the short-term performance of the Scottish economy.
Looking at the some of the indicators that underpin our model, it is worth making a few comments.
Firstly, the latest Bank of Scotland Purchase Managers Index (PMI) for Scotland registered a value of 50.57. This is down on the average PMI for the first three months of the year which came in at 51.02. It is worth remembering that any value above 50 indicates some degree of positive sentiment, with a larger value representing even stronger growth sentiment/expectations. For comparison, the equivalent measure for the UK in May 2017 was 56.7.
Secondly, retail sales by volume fell for the second quarter in a row (down -0.4% in Q1). This is, notably, the first time since Q1 and Q2 of 2012 that this has been the case. The recent decline in Scottish retail sales largely mirrors a similar fall in GB retail sales (which were down by -1.4% in volume in Q1). However, comparing over the last year (i.e. the most recent data to the same measure the year before) GB retail sales grew by 2.1% while Scotland only grew by 0.2%.
Thirdly, and on a (very slightly!) more positive note, the GfK consumer confidence index showed a slight improvement in Scotland to a value of -13. While still negative, it is slightly less negative than it was. The equivalent UK index has also improved and continues to remain less negative (-5) than Scotland. Remember that weak consumer confidence has persisted in Scotland since 2015, this isn’t a short term fluctuation.
It is widely accepted that recent economic growth in Scotland has been very disappointing. Based on our model results, and examination of some of the underlying data series, there appears little reason to expect to see a substantial improvement in the economic performance of the Scottish economy through the first 5 months of the year when further official data are released in due course.
Slightly later than usual, we release the results from our nowcasting model of the Scottish economy.
Our nowcasts show:
- GVA growth in 2017 Q1 was 0.31% which, at an annual rate, is 1.25%. This is down on our last nowcast.
- Our first nowcast for GVA growth in 2017 Q2 is 0.34% which, at an annual rate, is 1.43%
It is little surprise that we’re seeing a downward revision to our estimate of 2017 Q1 Scottish GVA growth.
Two obvious (although not exhaustive) reasons for this, firstly the recent release of 2016 Q4 GVA growth estimates for Scotland showed that the economy contracted by 0.2% in the final quarter of last year. Secondly, the UK Q1 GDP growth estimate released last month showed slower growth in the UK than in recent quarters.
Our nowcasting model has tended to track fluctuations in growth reasonably well, while overestimating growth. For instance, our model showed below trend (but still positive growth) for 2016 Q4, and on the official data the economy contracted. Similarly, the model estimating positive growth in Q1 2017. Given this, a further contraction in the economy in Q1 -and thus a technical recession- is clearly a possibility.
We’ll be looking at, and commenting more, on the release of data for 2017 Q1 and Q2 in the coming weeks on the Fraser of Allander Institute blog (fraserofallander.org).