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George Kerevan

Last week’s Bank of Scotland Business Monitor contained lots of good news about the Scottish economy. In the three months to the end of February, 41 per cent of surveyed companies increased turnover - a substantial improvement on the same quarter a year ago. Repeat business is high and exports - which had a poor 2013 - also show increasing vitality.

Donald MacRae, chief economist at the Bank of Scotland (with whom I shared a stimulating lunch the other week, hosted by the Norwegian ambassador) sums up the situation: "Expectations for 2014 are at their highest level since mid-2007, suggesting the recovery will continue throughout 2014 and will become increasingly embedded."

Last year Donald got a lot of stick for being optimistic regarding the Scottish economy but the numbers have proved him right. Can it really last? Let’s delve a bit deeper into the latest data on the Scottish economy and work out what is going on.


The Scottish economy has registered positive growth in each of the last six recorded quarters. Our old friends at the Fraser of Allander Institute have issued a new and higher forecast for Scottish economic growth in 2013. The say growth will come in at 1.7 per cent for last year – spot on the (downward) revised figure for the UK as a whole just issued by the Office for National Statistics. The Ernst & Young ITEM Club forecast for Scottish growth in 2013 (published last December) is even higher, at 1.9 per cent.

For 2014, Fraser of Allander has just revised up its forecast of Scottish growth from the 1.8 per cent predicted in October to a very healthy 2.3 per cent. The (earlier) ITEM forecast for 2014 is 1.7 per cent but expect that to go up. The Office of Budget Responsibility recently hiked up its UK growth forecast to a stunning 2.7 per cent.

But we are still living in the shadow of the great 2008-09 recession. In the third quarter of 2013 (the latest for which we have numbers) Scottish GDP was still 0.9 per cent below the pre-recession peak. However, that’s a bit better than for the UK, where GDP stood at 1.9 per cent below the peak.

With the current spurt of growth, UK output is slated to reach its pre-recession high sometime later this year. But the ITEM Club thinks Scotland has already recovered its previous peak. From the Q3 2013 data we possess, we know the service sector in Scotland is already 2.2 per cent above its pre-recession peak – a better figure than for the whole UK service sector.


Retail sales in Scotland increased by 1.1 per cent in volume terms during the fourth quarter of 2013. On an annualised basis, retail sales volumes grew by 4.0 per cent. That’s even a wee bit better than the GB situation, where retail sales increased by 0.8 per cent in volume during the fourth quarter, and by 3.7 per cent annually. Verdict: Scots are certainly taking part in the UK consumer boom.

However, if we look at the value of Scottish retail sales (without adjusting for inflation) the fourth quarter saw an increase of 0.9 per cent and 4.6 per cent annually. But the value of GB retail sales was up by 1.0 per cent in Q4, or 4.9 per cent annually. Both sets of data taken together suggest that Scots are buying more but cheaper goods. This may reflect a number of things: native canniness, a poorer income distribution in Scotland, and a weaker housing market.

Nevertheless, consumer spending is accelerating north of the border. Household final consumption expenditure increased by fully 2.0 per cent during the third quarter of 2013, according to Scottish Government data. The level of household expenditure is now a significant 5.3 per cent higher (£1,044m) than in 2012 Q3. How is this spending being financed?


On the export front, the latest figures we have are from Q3 last year – very long whiskers indeed. The official index of manufactured exports for July to September 2013 registered a real fall of 2.2 per cent (in volume terms) from the previous quarter. This followed a rise of 3.3 per cent in the second quarter.

In itself, this volatile pattern is not a problem because exports sales can be very lumpy and seasonal. However the 2013 Q3 export volumes are still 10 per cent below their peak in Q3 2008. This is worrying because it means there has been relatively little recovery in volume exports since the crash. Indeed, on a rolling-annual basis, comparing the most recent four quarters to the previous four, manufactured exports actually contracted by 0.9 points.

The big problem I can see is that the pound has been rocketing in value since the turn of the year, raising export prices and adding to the UK’s near record trade deficit. True, even if volume exports remain broadly static, the rise in sterling boosts export earnings. Indeed, there was a reasonable 6 per cent rise in export earnings (including services) in 2012. However, unless we grow export volumes – especially in high-value manufacturing – then Scotland’s economic recovery remains fragile.


The number of people working for Scottish companies is rising at its fastest rate for 16 years, according to the Bank of Scotland. A recent banks survey showed the steepest rise in private employment in the report's history. Recruitment in the housing and service industries was particularly strong.

Figures from the Office of National Statistics confirm the upturn in the labour market. Over the past year the Scottish employment rate has increased by a full 2 percentage points - larger than the 0.3 percentage point increase seen in England. Scotland now has the highest employment rate of the four UK nations. Scotland gained 79,000 new jobs in the year to January.

There are a few caveats, though. Employment data is often crude and unreliable. Certainly, employment is on the up, and that is good. But the number of part-time and temporary worker remains very high, suggesting low earnings. There also seems to have been a big loss of employment among men aged 35-49 in the middle of last year – around 20,000 of them. I’m not sure if they are going to get re-absorbed into the workforce easily.

At the same time, the latest FSB survey reveals that some 27 per cent of Scottish businesses see a lack of access to skilled staff as a significant barrier to growth. This is having a knock-on effect on wage costs.

Altogether, the data suggests a possible tightening of the Scottish labour market and a constraint on growth over the next 12 months.


The general improvement in the Scottish economy is also reaching the SME sector. Last month a report from the Federation of Small Businesses (FSB) showed SME confidence in Scotland had finally match the UK average, and was at its highest rate since 2010. As a result, more than half of all Scottish SMEs have plans to expand - with 27 per cent aiming to increase capital investment, while 7 per cent plan to increase staff numbers.

As ever, the big constraint on SMEs is working capital. One reason for the improved situation regards small firms in Scotland, apart from the general expansion of the economy, may be an easing in the availability of credit. The FSB reports that around 13 per cent of small businesses say credit availability is good or very good, compared with half that number a year ago. But that still leaves the banks with a lot of dissatisfied customers. And when will interest rates rise?


There will be much huffing and puffing between now and September 18 regarding the impact of potential independence on Scottish business. But if the recovery is anything to go by, Scottish business is getting on with the job and will cope - whatever the outcome.