BILL JAMIESON: SCOTLAND’S MYSTERY BUILDING BOOM

BILL JAMIESON

The Latest figures suggest Scotland has been in the throes of an astonishing construction boom – while the services sector – by far the largest part of the economy – was flat. That in itself is a highly concerning feature and suggests that, even before election uncertainties took hold, service sector confidence and investment may have plateaued.

Meanwhile the latest quarterly survey from the Scottish Chambers of Commerce this week shows that the economy in Scotland experienced slower than expected growth in the last quarter.  Employment growth was also weaker than at the end of 2014.

The business survey, carried out in conjunction with the Fraser of Allander Institute of Strathclyde University, suggested growth levels across most sectors slowed considerably compared with the final quarter of last year, but most indicators still remained above pre-recession levels and long-term averages.

Now look at those official Scottish government figures also out this week. These showed the economy to be growing slower than the UK overall. In particular Scotland’s services sector – the dominant part of the economy – is lagging well behind.

And, most concerning of all, most of the growth recorded in recent quarters is due to a phenomenal boom in construction, with growth rates a multiple of those elsewhere in the UK.

A genuine if extraordinary boom – or a statistical glitch?

Construction was up an unusually strong 6.1 per cent with production up by one per cent and services flat. Indeed, the business services sector contracted in the final three months of the year.

No less than two-thirds of the increase in Scotland’s GDP is attributed to this extraordinary construction sector boost.

On a 12 month comparison, output rose by 2.8 per cent between the end of 2013 and the end of 2014, while in the UK, the equivalent figure was up 3.1 per cent.

Comparing the whole of 2014 with 2013, construction was up 13 per cent, production up by only one per cent and the service sector by 2.3 per cent.

Could it be a secret new town conurbation been constructed? Might the entire government sector be building “iceberg homes”?

The authoritative public finance think tank Fiscal Affairs Scotland highlighted the strange anomaly of the construction figures – and it is not the first time it has done so. The strength of construction last year is even greater than the previous elevated levels of 7 per cent and eight per cent.

Last year, while the value of the UK construction sector was up 7.5 per cent, it fell in the final quarter.

The FAS analysis also highlighted the reason for UK GDP growing faster overall was the services sector, representing three-quarters of the economy. It grew twice as fast at the UK level (3.4 per cent) than in Scotland (1.7 per cent).

FAS also points out that average annual growth since 1998 has been 1.6 per cent in Scotland, and 2.2 per cent in the UK as a whole.

Much of that higher growth rate is linked to a faster-growing population in England. The per capita measure for Scotland is an average of 1.2% per year. The equivalent figure for the UK as a whole (excluding offshore oil and gas) is lower than Scotland’s, at 1 per cent.

Since the peak of economic output in 2008, the Scottish economy fell and rose again, to be 2.3% higher, while the UK economy, which hit a deeper trough but has since grown back more strongly, is 5.1% bigger.

John McLaren, of Fiscal Affairs Scotland, says the improvement recorded in the construction sector over the past year has been “remarkable but little commented upon”.  And he added that “the relatively sluggish performance of the services sector is a concern.”

The quarterly output figures were the first to adapt to a new method of measuring growth, which takes account of a wider range of factors including research and development, and illegal drugs and prostitution. But it is hard to see how these could account for the runaway construction boom.

Over at the SCC, the evidence of slowdown is of concern. SCC chief executive Liz Cameron said: “Other economies have moved on and we need to catch up and overtake them.

“Our first economic indicator covering 2015 depicts an economy that has returned to pre-recession levels and is now on a path of slower growth.
“However, it is not enough to get back to where we were – that wasn’t good enough then and it isn’t good enough now. Scotland needs to up our game and our targets.”

Last month the Bank of Scotland’s business monitor found the economy slowed in the three months to the end of February. It was the worst result for turnover in 21 months, suggesting the Scottish economy experienced a sharp jolt to growth at the start of this year, the business monitor said.

Turnover for firms in the production sector was down significantly while the services sector also showed a sharp slowdown. Firms also reported a fall in volumes of repeat business and new business while export activity increased slightly.

But it also found firms’ future expectations remained close to pre-recession levels. The monitor said this suggested growth would pick up in the second quarter of the year.

Possible solution: an invisible surge in the service sector with the statistics surpassing all previous peaks?

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