Are we growing or are we slowing? The latest State of the Economy Report from the Scottish government leaves no room for doubt.

For all the rhetoric of grievance, of being “held back by Westminster” and “London’s austerity agenda”, we’re growing – with the tenth consecutive quarter of growth.

And this, says chief economist Dr Gary Gillespie, “sustained growth in the Scottish economy is expected to be maintained this year with further increases in employment and output.”

His report says Scotland’s economy has enjoyed its fastest annual rate of growth since before the crisis and that forecasts and business surveys point to continued expansion in 2015.

The assessment was immediately hailed in a Scottish government press release, with its sanguine assessment of Scotland’s performance and outlook.

So, uplifting good news for now.

But this is a perfect example of the Janus-faced approach to economic assessment by the SNP administration.

It is keen to portray economic progress and growth under its watch. Scotland is advancing, its recovery is robust and its prospects encouraging. And to this, of course, the Scottish government’s stewardship has made a significant contribution.

But then there is the other face – a Scotland entrapped by Westminster austerity, and unable to grow because of the harsh policies of the Westminster government – one that has denied the SNP administration the levers of economic power.

The SNP won a stunning victory on the basis of the politics of grievance and is now pressing for more powers in addition to those in the Scotland Bill based on the recommendations of the Smith Commission.

But how can both assessments be right? Which one more accurately reflects the state of Scotland?

Dr Gillespie’s report is not one of unalloyed cheer. One dark spot is exports. He notes that although conditions are improving growth in Europe, one of Scotland’s key export markets, is still muted.

The report also shows that whilst the combined impact of the lower oil price on output and employment in the Scottish economy as a whole will be broadly neutral, there will be important regional and sectorial effects given the distribution of activity across the economy.

But overall, the report highlights the positive trends that have contributed to the growth recovery – including rises in domestic and inward investment and improving conditions in key export markets such as the US. These are expected to continue in 2015. The labour market has also seen continued jobs growth.

Business surveys point to a muted start to 2015 – evident also across the UK – “but conditions are expected to strengthen throughout the year2. It points to forecasters’ average projection for growth in 2015 is 2.3 per cent

Deputy First Minister John Swinney hailed the positive assessment. But he went on to bemoan budget spending cuts and that the general election result “means it cannot – and must not – be ‘business as usual’ as far as Scotland is concerned. It would appear that this has not been heeded.”

What of other pointers? The latest Bank of Scotland Purchasing Managers Index for the service sector out this week continued to strengthen in May, growing for a second month in a row and at the fastest pace since December.

The seasonally adjusted headline Bank of Scotland PMI – a single-figure measure of the month-on-month change in combined manufacturing and services output – strengthened to 51.9 in May, up from 50.7 in April. The latest reading was the best recorded of the year so far.

The service sector was the primary driver of growth, as a solid increase in new business drove activity up for the second month in a row. There were reports of success in winning new business from both domestic and international clients.

However, output in the manufacturing sector was reported to have fallen for a second month running due to a lack of incoming new orders. General election uncertainty and difficulties in sourcing new export business were reported to have weighed on new work. 

This sombre assessment is supported by the latest Business Trends Report by accountants and business advisers BDO. It finds that manufacturing firms reported the biggest decline in optimism since March 2013.

Exporters have been particularly hard-hit as the continued slow performance of the Eurozone hits overseas markets and the strong pound makes British goods more expensive. Added to this, low oil and gas prices have curbed investment by the sector and slowed orders for manufacturing firms in the region.

The four point drop in BDO’s Manufacturing Optimism Index means it currently stands at 103.4. Whilst this is still above the long term average, this is only due to the sector’s weak performance since the financial crisis.

This means the dual speed recovery looks set to continue. The drop in manufacturing confidence is in stark contrast to BDO’s Optimism and Output Indices, which predict overall business growth for the latter part of 2015. These held firm this month with each holding a reading of 104.5, pointing to strong confidence among most firms.

The manufacturing sector is still smaller than it was in 2008 so prospects for manufacturers need to be boosted to rebalance growth across the economy as a whole.

Commenting on the findings, MARTIN GILL, head of BDO LLP in Scotland, said “The Government’s plans to rebalance the economy are vital, but it is equally vital that the manufacturing sector reaps the benefits from these plans and receives the help it needs to thrive. In particular, we need to see the regional powerhouse plans translate into real support for the manufacturing sector.

 “Manufacturing is a key sector for economic growth, so specific support could help boost the economy as a whole. A measure such as a reducing National Insurance for manufacturers taking on new employees could create up to 5069 jobs in Scotland, and boost GDP by over £202m each year.”

So, continuing growth looks likely, and a pick-up in the service sector should help narrow the gap here between Scotland and the UK as a whole. But much still needs to be done to broaden the recovery and to rebalance the economy – an ambition where there is much to do.


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