Scottish Government

State of the Economy - March 2012

Summary of Key Conclusions

Recent Global Economic Developments

• Over 2011 we have witnessed a general setback to the global recovery, despite a relatively positive outlook this time last year. Increased global uncertainty relating to the Eurozone sovereign debt crisis, which threatened financial contagion across financial markets, coupled with a general slowdown in many of the world’s key economies, resulted in weaker global growth in 2011 than expected.
• As a result, we have yet to witness a sustainable global recovery from the 2008 financial crisis. Global uncertainty has continued into 2012 with most advanced economies reporting a slowdown in economic growth at the end of 2011 alongside weak forecasts for the first half of 2012.
• At best, it could be 2013 – at least five years after the crisis began – before we can be fully confident of a return to long-term growth in the global economy.
• The UK recovery remains particularly fragile with newly revised figures showing positive output growth in only 2 of the last 5 quarters. Most independent forecasters anticipate broadly flat growth over the first 6 months and weak growth overall in 2012.

Recent Scottish Economic Developments

• The recovery in output in the Scottish economy has continued during 2011 albeit at rates substantially below trend. Output increased by 0.2% in Q1, 0.2% in Q2 and 0.5% in Q3 2011. Survey evidence suggests that while the private sector continued to grow in 2011, growth weakened towards the end of 2011. Given the contraction in UK economic activity in Q4 and the related uncertainty at that time, Scottish output growth figures for Q4 are likely to be – at best – muted.
• Over the year to Q3, and on a 4Q-on-4Q basis, output has grown by 0.9% in Scotland compared to 1.1% for the UK, though this in part reflects the fact that output fell further in the UK economy during the recession. As a result, by the end of Q3, Scotland and the UK remained 3.3% and 3.9% below pre-recession levels of output respectively.
• The Scottish labour market performed more strongly than the UK over the start of 2011, but has weakened over the past few quarters. Unemployment is now 8.6% which is slightly higher than the UK rate of 8.4%. Scotland’s employment and inactivity rates remains better than for the UK as a whole.
• Although, business surveys indicated a slowdown in activity toward the end of 2011, the first two surveys of 2012 show private sector output picking up slightly in the new year. The Bank of Scotland PMI indicator – one of the most robust early indicators of performance in the Scottish economy – has now reported thirteen consecutive months of expansion in private sector output.

Future Prospects - Global Economy

• The global recovery is expected to remain fragile through much of 2012. Despite some stability returning to the Eurozone, there are still uncertainties over how imbalances in government finances will play out over the year and the world economy remains vulnerable to further shocks and instability.
• Emerging economies will lead global growth but their growth will be moderated by actions that are being taken to contain inflationary pressures.
• Unemployment is expected to remain high across the advanced world as output growth remains subdued and because sustained gains in employment tend to lag a return to growth in the wider economy.
• Overall the outlook remains uncertain but growth is expected to gather pace at the end of 2012 and into 2013.
• The key to a sustained recovery – both globally and in the UK – is a coordinated approach to both promoting continued growth in the short-term, and at the same time, putting in place the structural reforms to resolve the imbalances in the economy that arose in the lead up to the financial crisis.
• Europe is now a very good example of how difficulties within one geographical area (sovereign debt of eurozone members) have the potential to derail recovery across the world due the inter-dependencies of the global financial system.
• Similar issues exist in different forms in other areas, for example in relation to international trade, regulation, commodities, government finances and household debt. Without a systematic resolution to these issues, the global economy is likely to be fragile and susceptible to shocks and instability.

Future Prospects - Scottish Economy

• Scottish growth is forecast to remain subdued at least until halfway through 2012, with a pick up in growth expected thereafter.
• As an open economy, the strength of the recovery will depend on events in our key export markets – the UK, US and EU – and the ability to increase Scotland’s share of global investment and trade, particularly in new growth markets.
• As well as exports, private investment will also remain key to help counterbalance consolidation in the public sector. We may also witness some recovery in household consumption as inflation falls, real incomes pick up and confidence returns.
• The labour market will remain a key challenge. With output growth forecast to remain relatively subdued, a sustained improvement in employment will be dependent upon securing a sustainable recovery in confidence and output.