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.

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.