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Scotland’s economic growth is starting to slow down

By Stuart McIntyre - Posted on 15 May 2015

Dr Stuart McIntyre, lecturer in economics and associate of the Fraser of Allander Institute (FAI), discusses the latest results of a project nowcasting the Scottish economy. This project is joint work with Grant Allan (Department of Economics and FAI), Professor Gary Koop (Department of Economics) and Paul Smith (Markit PLC). A fuller outline of the methodology and pseudo-real time nowcast evaluation is available in the working paper.

What is nowcasting?

Nowcasting an economy is the attempt to predict the present state of economic growth. Given delays in the release of official estimates of economic growth (around 25 days for the UK’s first estimate and 115 days for Scotland), it is useful to be able to produce approximations not only more quickly after the end of the quarter, but also during the quarter itself.

An ongoing project through the Fraser of Allander Institute at Strathclyde Business School, is seeking to nowcast the Scottish economy. Through the project blog, a new estimate of the current growth rate of the Scottish economy has been released every month since late last year. In addition the first ‘live’ nowcast evaluation was recently released.

The results

The most recent nowcast measured the growth of the current quarter, Q2 2015, and provided revised estimates for Q1 2015.  These estimates show:

  • Growth in Q2 2015 has declined slightly from our estimates for Q1 2015
  • The Scottish economy is growing at 0.51% in Q2 2015, with a revised estimate for Q1 2015 of 0.53%
  • This compares to official estimates of Scottish GDP growth of 0.6% for Q4 2014
  • Our nowcasts for the first two quarters of 2015 show a slowing down of Scotland’s economy relative to the end of 2014

What does this mean?

Our nowcasts demonstrate that growth in Q1 and Q2 2015 has been weaker in Scotland than we found it to be in the previous quarter, and lower than the first official estimate of Q4 2014, released in April 2015. While the Scottish economy is still growing, these estimates suggest it is doing so at a lower rate than in previous quarters, although more quickly than the UK as a whole.

Putting it in context

UK growth in the first quarter of 2015 was recently announced to be 0.3 per cent, somewhat weaker than expected and lower than previous quarters. This has important implications for Scotland given that around 62 per cent of all Scottish exports are to the rest of the UK.  In addition, we learnt in April that Scottish manufactured exports dipped by 0.8 per cent at the end of last year.  A majority of 60.2 percent of Scottish exports to outside of the UK were from the manufacturing sector, so its decreased activity may have impacted Scotland’s economy. External factors for both the UK and Scottish economies continue to be a cause for concern. Growth in Europe is still weak, explained in part by ongoing financial concerns across the globe. Even China has started using monetary policy to stimulate its economy.

Beside this somewhat negative news for the economy, we have seen improvements for employment in Scotland. Youth unemployment is at its lowest level in the past five years. This result is echoed in a recent report by Bank of Scotland although it suggests the pace of job growth is slowing.  The report also indicates a decline in jobs in some parts of Scotland, including Aberdeen - likely linked to recent events affecting the North Sea oil and gas sector - but job growth elsewhere (e.g. Dundee). The most recent Aberdeen & Grampian Chamber of Commerce Oil and Gas Survey identified significant deterioration in confidence in the sector, hitting a six year low. Nevertheless, it has been well documented that, following the Wood Review, the sector in Aberdeen is facing a period of transition; something which is likely reflected in the employment data.

In short, the prevailing news suggests that growth in Scotland is likely to be slower than that seen in Q4 2014 but will remain positive through the middle of 2015.

Which factors do you think could be slowing the rate of Scottish economic growth? Share your comments below.

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