During the course of 1986 economic growth in Scotland and in the rest of the UK is likely to proceed less rapidly than in 1985. Moreover, changes in the Scottish pattern of growth will reflect those taking place in the UK generally and in other European economies

Draper, Paul

Heeley, John

Jenkins, Iain

Lockyer, Cliff

Love, James

Love, Jim H

McGregor, Peter

McNicolI, Iain

O'Donnell, Noreen

Simpson, David

Stevens, Jim

Tait, Elizabeth

Walker, Jim

University of Strathclyde Institutional Repository

Strathprints Institutional RepositoryLove, James and Draper, Paul and Heeley, John and Jenkins, Iain and Lockyer, Cliff and Love, Jim H and McGregor, Peter and McNicolI, Iain and O'Donnell, Noreen and Stevens, Jim and Simpson, David and Tait, Elizabeth and Walker, Jim (1986) Outlook and appraisal [February 1986]. Quarterly Economic Commentary, 11 (3). pp. 1-2. ISSN 2046-5378 , This version is available at http://strathprints.strath.ac.uk/53265/Strathprints is  designed  to  allow  users  to  access  the  research  output  of  the  University  of Strathclyde. Unless otherwise explicitly stated on the manuscript, Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Please check the manuscript for details of any other licences that may have been applied. You may  not  engage  in  further  distribution  of  the  material  for  any  profitmaking  activities  or  any commercial gain. You may freely distribute both the url (http://strathprints.strath.ac.uk/) and the content of this paper for research or private study, educational, or not-for-profit purposes without prior permission or charge. Any  correspondence  concerning  this  service  should  be  sent  to  Strathprints  administrator: strathprints@strath.ac.ukUniversity of Strathclyde The Fraser of Allander Institute Quarterly Economic Commentary FRASER of ALLANDER INSTITUTE The Fraser of Allander Insti tute for Research on the Scottish Economy was established in the University of Strathclyde on 1 January 1975, as the result of a generous donation from the Hugh Fraser Foundation. I t s principal function i s to carry out research on the Scottish economy and i t s research programme includes the analysis of short term movements in economic ac t iv i ty . The resu l t s of t h i s work, carried out in conjunction with the Department of Economics, are published in the Institute's Quarterly Economic Commentary. The Insti tute also publishes a series of Research Monographs and a series of Discussion Papers to provide an outlet for original research on medium term and long term aspects of the Scottish economy. Information for subscribers The Quarterly Economic Commentary i s published in February, May, August and November. Subscription queries should be addressed to the Secretary, the Fraser of Allander Inst i tute. Notes to contributors The editor welcomes contr ibutions to the Briefing Paper, Feature Art ic le and Economic Perspective sect ions. Material submitted should be of i n t e r e s t to a predominantly Scottish readership and writ ten in a s ty le i n t e l l i g i b l e to a non-special is t audience. Footnotes and r e f e rences should conform to recen t i s s u e s of the Commentary. Contributions should be typed and two copies submitted to the Editor. Editor: James Love Editorial Assistant: Joan Bennett Paul Draper, John Heeley, Iain Jenkins, Cliff Lockyer, Jim H Love, Peter McGregor, Iain McNicoll, Noreen O'Donnell, Jim Stevens, David Simpson, Elizabeth Tait and Jim Walker. John Blackhall and Elizabeth Tait Sheelagh Blackhall and Isobel Sheppard The Fraser of Allander Institute Curran Building 100 Cathedral Street GLASGOW G4 OLN 041-552 4400 Ext. 3958 Contributors: Graphics: Production: QUARTERLY ECONOMIC COMMENTARY OUTLOOK AND APPRAISAL 1 THE WORLD ECONOMY 3 THE BRITISH ECONOMY 9 Macroeconomic T r e n d s 9 L a b o u r M a r k e t 12 THE SCOTTISH ECONOMY I n d u s t r i a l Performance 18 The Service Sector 36 Labour Market 40 Regional Review 51 ECONOMIC PERSPECTIVES The Green Paper on Local Government Finance 53 Scottish Steel at the Crossroads 61 1986: A Significant Year of Change for TourismOrganisations in Scotland? 66 The F u t u r e of Commercial V e h i c l e Manufacture!nthellnited Kingdom 70 Opinions expressed in signed contributions are those of the authors and not necessarily those of the Fraser Insti tute. 0 Fraser of Allander Institute 1986 Outlook and Appraisal During the course of 1986 economic growth in Scotland and in the r e s t of the UK i s l ike ly to proceed l e s s rapidly than in 1985. Moreover, changes in the Scottish pattern of growth wi l l re f lec t those taking place in the UK generally and in other European economies. Growth in 1985 was influenced in part by two factors which have now largely worked their way through the system. The f i r s t was the "rebound" effect associated with the ending of the miners' dispute. The second factor was the bringing forward of investment projects in the f i r s t quarter of 1985 in response to the April reduction in c a p i t a l a l lowances . While some i n c e n t i v e remains to br ing forward investment before the shi f t to a new system in April of t h i s year, companies have probably a l ready taken as much advantage as p o s s i b l e of the more favourable features of the old regime. This, along with continuing high real interest rates, suggests that investment expenditure in Scotland is likely to grow by something of the order of 2% t h i s year as a g a i n s t a r o u n d 3% i n 1 9 8 5 . Deceleration of export growth i s also l ike ly to contribute to slower growth. The s t r e n g t h of s t e r l i n g and t h e slowing of the world economy from i t s period of substantial expansion in 1983/84 are l ike ly to depress Scott ish export growth by 1% from the rate of around 4% in 1985. While the scope for income tax reductions in the March Budget has a l l but been effectively eliminated by the effects on the Exchequer's revenues of fa l l ing o i l pr ices , growth of consumer expenditure will assume a dominant role in determining aggregate demand. The principal source of h igher consumer spending w i l l be continuing increases in real earnings. Expansion of consumer spending i s unlikely, however, to offset slower growth elsewhere and overall Scott ish growth i s l ike ly to be of the order of 2% for 1986. The most recent Scottish Business Survey again confirms the pattern of change in the economy. As in a l l five previous Surveys, retailing respondents in January 1986 report considerable optimism about trading conditions. This fully reflects the influence of rising consumer spending but contrasts sharply with the continuing pessimist ic outlook among construction companies resulting from further declines in public sector capital expenditure. In manufacturing there has been a return to the cautious optimism detected in the f i r s t t h ree q u a r t e r s of 1985, most p r o b a b l y as a consequence of the depreciation of sterling against European currencies such as the Deutsche Mark in recent months. Nevertheless, Scottish manufacturing remains characterised, as i s c o n s t r u c t i o n , by cons iderab le spare capac i ty and a def ic iency of orders remains the most important constraint on ac t iv i ty . Disappointingly after the apparent end to labour-shedding to September 1985, Scot t ish manufacturers reported job losses in the l a s t thee months of 1985 which they expect to be repeated in the f i r s t part of t h i s year. Large and continuing r educ t ions were repor ted in c o n s t r u c t i o n employment. Only s l ight increases in employment are occurring in r e t a i l i n g and job gains are concentrated exclusively among part- t ime staff , with fu l l - t ime staff being l a i d -off. Against this background, Malcolm Rikfkind has now taken over as Secretary of State for Scot land. He faces formidable d i f f i c u l t i e s on a number of f r o n t s , inc luding the t e a c h e r s ' dispute, the continuing debate on ra tes reform (see Economic Perspective), uncertainty over the futures of Ravenscraig (see Economic Perspective) and of shipyards such as Ha l l -Russe l l and Scot t -Li thgow, the emerging o i l price threat to North Sea developments, and rising unemployment. During the term of office of Mr Rifkind's p redecessor , Mr George Younger, the Scottish economy experienced considerable change. Adjustment must take place in response to advances in technology and changes in demand pat terns and the most successful development during Mr Younger's t e n u r e o c c u r r e d in e l e c t r o n i c s . 1 Although, as i s inevitably the case where the pace of technological advance i s r ap id , not a l l companies prospered, Scotland has succeeded in a t t r ac t ing inward investment. New investments in e l e c t r o n i c s a r e , however, c a p i t a l -intensive and some uncertainty ex i s t s as to the ex ten t of the s e c t o r ' s net employment generation (see Electrical and Instrument Engineering). Undeniably, however, the jobs created were limited in r e l a t i o n t o the heavy job l o s s e s e lsewhere . Continuing net l o s s of employment proved an intractable problem for Mr Younger. Despi te repeated a s s e r t i o n s of the "high pr ior i ty" he assigned to tackling unemployment, Mr Younger saw the Scottish unemployment rate r i s e from 7? in 1979 to 16.4% in January 1986. This reflected the substant ia l erosion of Scotland's manufacturing base. Partial solution to the problem was sought in the promotion of the service sector. The shortcomings and l imited impact of t h a t s t r a t e g y are discussed in the November Commentary and elsewhere in this Commentary (see Labour Markets). In attempting to resolve the problems he inherits,Mr Rifkind i s constrained by a number of related factors. First, there have been r e c e n t improvements in Scotland's r e l a t i ve positions in regional comparisons of unemployment and income per head. These improvements have largely resulted from more widespread contraction in other reg ions such as the West Midlands. Sco t land ' s unemployment, although beginning from a high base, has risen less rapidly than that in some other regions and Scott ish income per head has been boosted by oil-related developments. The significance of these improvements i s that Scotland i s no longer perceived as a region in need of special consideration. "Special pleading" on regional grounds is l ikely to be of no avai l . Secondly, the Government's economic strategy expl ic i t ly precludes cer tain options. Mr Rifkind can expect at best only a l i m i t e d s t imulus from publ ic expenditure. While there are some signs of s l i g h t f i s c a l r e l a x a t i o n (see UK Economy), the Government continues to pursue what i t regards as a "cautious and prudent" approach to public spending. Fa i th in the e f f icacy of the market remains a fundamental element of policy. The market has failed, however, to provide a self-correct ing mechanism capable of resolving the problems of manufacturing decline and unemployment. Moreover, despite i t s free market philosophy, the Government actively intervenes by means of i n t e re s t ra te adjustment to regulate a price which has a considerable bearing on manufacturers' p ro spec t s , namely the e x c h a n g e r a t e . Exchange r a t e depreciation is not in itself, however, a suff icient solution. This was apparent in the period 1981 to 1985. Despite marked reductions in s t e r l ing ' s t rade-weighted index between 1981 and 1984 and substant ia l growth in world t rade, UK exporters, although achieving higher export l eve ls , fai led to make gains in market shares. Maintenance of a strong pound, however , i n t e n s i f i e s t he competitive pressure on UK exporters. The difficulties imposed by policy towards the exchange ra te are compounded by the third const ra in t , namely the absence of a positive industrial strategy. With good reason, the Government shies away from protectionist po l ic ies . Rejection of protectionism need not be synonomous, however, with abrogation of support to i ndus t ry . I n d i r e c t s t a t e a ids to industry on energy, labour and transport a re widespread among our European competitors. The re la t ive paucity of such support in the UK further exacerbates the compet i t ive p re s su re s facing UK companies. To Mr Rifkind's advantage, there is within Scotland a c l e a r e r semblance of an indus t r ia l strategy than ex is t s at the national level. The Scottish Development Agency seeks to perform a "catalytic" role in promoting investment in cer tain areas of the economy. Other UK regions tend to regard the ex i s t ence of a separa te regional agency as giving Scotland an unfair advantage, a view l ikely to be received sympathetically by Government, given the narrowing of UK reg iona l d i spa r i t i e s and the desire to constrain public expenditure. From a Scottish p e r s p e c t i v e , t he r e i s a case for a broadening and strengthening of the SDA's industrial role. At the moment the SDA's emphasis i s heavily on a t t rac t ion of foreign investment and promotion of small business. Ar res t ing the process of indus t r ia l decline requires expansion of the SDA's services to encompass companies already established, medium to large companies, and indigenous companies. Securing such an outcome would be an important f i r s t step in Mr Rifkind's defence of the Scottish economy. 15 February 1986 2 

Outlook and appraisal [February 1986]

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Outlook and appraisal [February 1986]

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