The outlook for the Scottish economy is favourable over the coining months, but probably less favourable than the outlook for the UK economy as a whole

Ashcroft, Brian

Boyle, Stephen

Draper, Paul

Harrigan, Frank

Heeley, John

Jenkins, Iain

Lockyer, Cliff

Love, Jim H

McGregor, Peter

McNicolI, Iain

Perman, Roger

Simpson, David

Stevens, Jim

Walker, Jim

Name not available

Outlook and appraisal [May 1987]

University of Strathclyde Institutional Repository

Strathprints Institutional RepositoryAshcroft, Brian and Walker, Jim and Boyle, Stephen and Draper, Paul and Harrigan, Frank and Heeley, John and Jenkins, Iain and Lockyer, Cliff and Love, Jim H and McGregor, Peter and McNicolI, Iain and Perman, Roger and Simpson, David and Stevens, Jim (1987) Outlook and appraisal [May 1987]. Quarterly Economic Commentary, 12 (4). pp. 1-2. ISSN 2046-5378 , This version is available at http://strathprints.strath.ac.uk/53228/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.ukQuarterly Economic Commentary we gratefully acknowledge the contribution of the Buchanan and Ewmg Bequest toward publication costs OBITUARY The staff of the Fraser of Allander I n s t i t u t e learned with great sadness of the death of Sir Hugh Fraser on 5 May. The Inst i tute has been generously funded by the charitable trust se t up by Sir Hugh's family, whose name i t bears. I t i s less well-known that the ini t ia t ive for the establishment of the Insti tute came from Sir Hugh himself, and that i t was at h i s own suggestion tha t the I n s t i t u t e ' s f i r s t research project was undertaken. This was the preparation, in co-operation with the S c o t t i s h Council (Development and Industry) and with IBM's United Kingdom Research Centre, of the f i r s t - ever set of input-output tab les for Scotland. Despite the authority which his experience of the world of business had given him, - only a short time earlier, Sir Hugh had been chosen by The Guardian newspaper as i t s Young Businessman of the Year - a t no time did he attempt to influence the opinions or views of the I n s t i t u t e ' s staff. We are proud to salute a kind and disinterested benefactor; we should l ike to believe tha t the achievements of the I n s t i t u t e which he did so much to create were a source of satisfaction to Sir Hugh. David Simpson Research Professor 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 activity. Along with the 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. The I n s t i t u t e i s a research unit in the Strathclyde Business School, a faculty of the University of Strathclyde. Information for subscribers The Quarterly Economic Commentary i s published in February, May, August and November. Annual subscription r a t e s are £20.00, or £5.50 per s ingle issue. Queries should be addressed to the Secretary, the Fraser of Allander Institute. Notes to contributors The edi tors welcome 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 wri t 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 r e n c e s should conform to r ecen t i s s u e s of the Commentary. Contributions should be typed and two copies submitted to the Scottish Editor. Commentary Team Editors : Brian Ashcrof t (UK and General) and Jim Walker, TSB Fellow (Scottish) Contributors: Stephen Boyle, Paul Draper, Frank Har r igan , John Heeley, I a i n Jenkins, Cliff Lockyer, Jim H Love, Peter McGregor, Ia in McNicoll, Roger Perman, David Simpson and Jim Stevens. Graphics: Stephen Boyle Production: Sheelagh Blackhall and Isobel Sheppard The Fraser of Allander I n s t i t u t e Curran Building 100 Cathedral S t r ee t GLASGOW G4 0LN 041-552 4400 Ext. 3958 QUARTERLY ECONOMIC COMMENTARY » » * » . COMMEMTARY « « • « « OUTLOOK AND APPRAISAL 1 THE WORLD ECONOMY 4 THE BRITISH ECONOMY 8 Macroeconomic Trends 8 Labour Market 11 THE SCOTTISH ECONOMY I n d u s t r i a l Performance 18 The Serv ice Sector 41 Labour Market 46 Regional Review 59 » « « » « VIEWS • • • • • BRIEFING PAPER Scotland's Export Performance - a closer look by Mark Cox 63 ECONOMIC PERSPECTIVES 1. Making Tracks: Caterpillar's Crawl from Scotland by Nigel Haworth 67 2. Scottish Tourism - Premier League Charms but Second Division Attractions by John Heeley 72 3. Accountability and Regional Control: Options for Reform by C Moore and S Booth 75 INDEX Vols 9-11 80 Opinions expressed in signed contr ibutions are those of the authors and not necessarily those of the Fraser Institute ©Fraser of Allander Institute 1987 Outlook and Appraisal The outlook for the Scottish economy i s favourable over the coining months, but probably less favourable than the outlook for the UK economy as a whole. Recent evidence provided by the London Business School on the under lying performance of the OK economy, suggests that during 19-86 the economy began to grow above i t s trend r a t e af ter a period of below trend growth from l a t e 1984. We expect tha t during 1987 the growth ra te will improve further relative to trend and probably peak in the middle to l a t e 1988. However, there i s the worrying possibility that the inflation rate may be rising to a l e v e l which could f r u s t r a t e t h i s prediction. Unlike the 1970s and early 1980s when output actual ly rose and f e l l over the duration of the cycle, recent cycl ical movements have occurred aga ins t a background of continuing positive growth. The Br i t i sh economy i s now entering i t s s even th y e a r of p o s i t i v e g r o w t h , suggesting that the cyclical behaviour of the economy may now have reverted to the experience of the 1960s when cycl ical movements represented successive periods of above and below trend growth rather than r i s e s and f a l l s in the level of output. If t h i s in fact proves to be the case, the explanation of the change would appear to l i e in the absence during the 1980s of the external shocks to the UK economy which characterised the 1970s, par t icular ly the oi l price increases in 1973/74 and 1979/80. In o ther r e s p e c t s , though, r ecen t experience d i f fers from that of the 1960s. During 1986 the UK experienced faster economic growth than the major European economies and in 1987 i t s growth could exceed that of the US and Japan. The reasons for t h i s improvement in Br i ta in ' s r e l a t ive economic performance are less than straightforward. In the 1970s, Br i ta in ' s economic cycle broadly moved in l ine with the cycle in the OECD countries. The major difference between the UK and world economic performance being t h a t the c y c l i c a l pattern of UK upswings and downswings was more pronounced . From 1979, the combination of the deflationary effects of the o i l p r i c e r i s e , and the sharp appreciation of s t e r l i ng , reflecting i t s new-found status as a "petrocurrency" and monetary contraction, produced a severe recession as indus t r ia l output f e l l 6.8% below t h a t of 1978. The recess ion occurred more quickly and was therefore i n i t i a l l y more severe than the recession in the r e s t of the world, but by 1982 the OECD countries were experiencing a more pronounced recession while the UK had already embarked on an upward growth path. In view of the experience of the 1970s, and the earlier UK recession and upturn in 1981/82, i t might therefore have been expected tha t following the UK peak in 1984/85 t he r e would have followed a sustained period of below trend growth at a time when other indust r ia l countries were either s t i l l in the upswing of their c y c l e , or in the ear ly s t ages of a downturn. This did not happen. A trough was reached in l a t e 1985 ea r l i e r than might have been expected at a higher rate of growth, and the economy reverted during 1986 to growth a t , or above, trend, with the possibility that the trend i tself may have shifted in favour of higher potential growth. The main forces underlying the improvement in Britain's economic growth have been the strong growth in consumer spending and, perhaps more importantly, the recent 1 s t a t i s t i c cotihued to f a l l . I t should f i r s t be remembered t h a t unemployment t akes t ime t o respond to changes in economic activity. When economic activity expands adjustments are f i r s t made to labour demand wi th in f irms' in ternal labour markets before employment increases as workers are hired from the external labour market (see Labour Market section). Even then registered unemployment may not fall because the new jobs may be fil led by workers moving from one job to another, by migrants from other regions, or by labour suppl ied from the non - r eg i s t e r ed or "h idden" unemployed. R e g i s t e r e d unemployment w i l l be affected but only af ter a lag of perhaps nine months or more. On t h i s b a s i s the e f f e c t s of improved UK economic growth should now be beginning t o a f f ec t the unemployment register. However, i t i s clear that the recovery in economic activity in Scotland i s lagging behind tha t of the UK. Furthermore, the harmful effects of the o i l -p r i ce f a l l on the oil supply industry have been largely localised in Scotland and while the worst i s over the impact i s s t i l l coming through to the unemployment r e g i s t e r . In addition, the twelve major redundancy announcements between November and the end of January, which were discussed in the February Coamentary, have s t i l l t o r e g i s t e r t h e i r f u l l i m p a c t on unemployment. An a n a l y s i s of the unemployment flows on to and off the register in Scotland compared with the UK, shows that in the three months to January, when unemployment was s t i l l r i s ing in Scotland while falling in the UK, the rate of inflow on to the reg i s te r rose in Scotland compared to the UK, while the ra te of outflow rose, as in November, or remained broadly the same as tha t in the UK. This might superficially be taken as indicating t h a t by the end of 1986 the benefits of increased training programmes and improved UK growth were affecting the general demand for labour in Scotland to some degree, but the downward effect on unemployment was more than offset by the inflow of redundancies due to the special circumstances that affected par ts of the Scottish economy last year. If there i s any substance to this argument then we should expect i nc reas ing ly favourable effects on the labour market and hence unemployment in Scotland but offset to some extent by the diminishing impact of l a s t year 's shocks. For these reasons the outlook for the Scottish economy and the labour market in Scotland i s expected to be favourable over the coming months, but l e s s so than tha t in the UK. Final ly, i t must be remembered that recovery in Scotland i s starting from a much lower base than in the country as a whole; that the longer-run forces tending to increase regional imbalance in the UK should not be forgotten since the evidence shows that in acyclical upturn there i s a narrowing of the imbalance around the long-run trend; and that the prospects for further growth in both Scotland and the UK depend crucially on what happens to the r a t e of inf la t ion . There i s s t i l l a long way to go. 18 May 1987 

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Outlook and appraisal [May 1987]

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