The Scottish Economy
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The Scottish Economy orders from and sales to non-UK sources remain Industrial Performance fairly buoyant, but less so than the previous survey. Two explanations for the continuing growth in export orders and sales might be applied here. First, the slide of sterling may have played a positive role. Second, the contraction of domestic demand in the face of high interest rates may have forced companies to switch their activities abroad. H There is still no evidence in the SCBS that H Scottish manufacturers' investment intentions have == been adversely affected by the steep rise in r~-~. interest rates. This suggests that part of the Wff external deficit may at least be attributable to 7 imports of investment goods which should hopefully -- / be eventually self-financing. * The CBI survey, which is confined to the Scottish manufacturing industry, continues to hold a less optimistic view on this sector. This is reflected in the reduced balance of firms reporting output and new orders increases over the past four months, as compared with the previous BUSINESS SURVEYS survey. Output growth is expected to slacken further over the next four months, contrary to the The latest CBI Industrial Trends Survey and ththe case in the SCBS where a marked increase is Scottish Chambers' Business Survey (SCBS) were recorded. carried out between March and April and betweeitween April and May respectively. The results of both The CBI survey also records a healthy growth of surveys refer to the first quarter of 19891989, export orders over the past four months. against a background of sliding sterling, high However, this growth seems set to turn, with a net interest rates, and rising inflation. Itt iiss of 1% of firms expecting a reduction in export perhaps not surprising that the SCBS, whichi wawass orders in the next four months. This result is more optimistic than the CBI survey in the last also at odds with that recorded in the SCBS, where report, reserves a cautious view on the immediatsdiate a net of 36% of firms expect a rise in the next outlook for the Scottish economy, particularly foforr three months. The loss in confidence indicated the manufacturing industry. The CBI survey shows in the CBI survey seems to result from the a continuing fall in business confidence for• ththee Scottish manufacturers' increasing fear about second consecutive survey. their price competitiveness in the international market. This fear is indicated by the The SCBS records a significant fall in confidencidence expectation of a drastic rise in the average costs among manufacturing respondents, from a +12+12% per unit of output and the average prices at which balance more optimistic in December to a -13-13% export orders are booked. It also can be seen balance. This fall in confidence is underpinnesinned that respondents to the CBI survey are more by a static trend in output and evidenc;ee ooff concerned about political and economic conditions declining orders. The worst affected, as might abroad than they were in the last survey. be expected in the light of present domestinestic Additionally, new evidence from both surveys economic conditions, are orders and sales from confirms our previous view that capacity Scottish and rest of the UK sources. However><ever, constraints are beginning to bite for some 13 manufacturing activities. And there are some for the other sub-activities over the next four hints, clearer in the CBI survey than in the SCBS, months. that the Scottish manufacturers' investment intention is showing signs of a weakening, in Retailing and Wholesaling remain surprisingly spite of the evidence that respondents to both buoyant. This is clearly shown in the SCBS, with surveys do not consider the cost of financing a substantial increase in the confidence about investment expenditure as a constraint on their the general business situation and in the actual plans. The latest 1% further rise in the trend in total sales, employment and investment interest rates on 25 May render the issue of intentions. This optimism is going to hold up investment intention even more obscured. over all aspects for wholesaling, and over most aspects for retailing except that employment is As for the employment prospect for the Scottish expected to fall in the next three months. manufacturing industry, again divergent results arise from the two surveys. The SCBS records a It is a bit of a surprise to find no indication flat trend over the past three months, whilst the yet that retail activity in Scotland has been hit CBI survey shows a balance of 5% of firms cutting by the increase in interest rates. To the extent down employment over the past four months. It is that house price appreciation and the associated hard to explain how these divergences occur, accumulation of non-human wealth stimulate although it is noted that the CBI survey has a consumption, the impact of increased interest small Scottish sample. However, one unequivocal rates on expenditure may be further deferred. thing in both surveys is that employment in the Scottish manufacturing industry is expected to be In retailing; a casual inspection of the regional reduced by a balance of respondents in the coming divergence reveals that only respondents from the quarter. Glasgow chamber, who carry a large weight in the total returns, claim to be significantly more The SCBS suggests some divergences in optimistic about their business prospects. This manufacturing fortunes across regions. optimism among Glasgow respondents is going to Respondents from Aberdeen and Dundee are more remain in the next quarter. There seems to be a optimistic about their general business situation strong pick-up in confidence among Aberdeen than reported in the last survey, whereas respondents. Dundee and Edinburgh respondents respondents from the Glasgow and Edinburgh remain depressed in the coming quarter. chambers suffer a marked loss in their business confidence. Although respondents from Glasgow In wholesaling, there is also a divergence of are picking up confidence over the expected trend fortunes across the regions. Aberdeen in sales and orders in the next three months, the respondents are the most optimistic, and remain immediate employment prospect is still depressing. confident in the next quarter. Dundee The less optimistic view on every economic aspect respondents, while satisfied with their sales among Edinburgh respondents is going to prevail performance and prospects, reserve a cautious view for some time. To the extent that windfall gains about their employment prospect. Edinburgh arise from a 50% rise in oil price up to May this respondents are gaining some confidence compared year, it is not surprising that Aberdeen with the last survey, despite the fact that their respondents are in the most confident mood. business situation is still flat. A causal inspection of Glasgow respondents' sales and The CBI survey provides additional information on employment performance and prospects reveals that sub-manufacturing activities. The depressing they are not doing so badly as might be indicated view on the general business situation in the past by their disappointment at the general business four months is pervasive among respondents across situation. these activities. Most notable are Chemical, Mechanical, Instrument, Electric and Vehicle The SCBS shows a continuing significant positive Engineering respondents who reversed their optimism among the Construction respondents. The business confidence to a substantial extent in the optimism is underpinned by a strong positive past four months, whilst Textiles respondents trend, both actual and expected, in the growth of remain depressed. However, except these most orders, sales and employment. The orders come depressed sub-activities, there are indications of from both the government and the private sectors, a pick-up in output and especially export orders with the private orders being the main source. 14 Capacity utilisation remain uniformly high in all increases has been largely unfulfilled. areas. This evidence is consistent with the view that the recent buoyancy of the housing market in Support costs reached levels which eventually Scotland is continuing to feed strongly into the became politically unsustainable, and the result good fortunes of the Construction sector. has been a period of dramatic cuts in the cost of support; the speed and intensity of these cuts has A positive balance of Scottish financial resulted in hardship in many parts of the respondents report that they increased their agricultural sector. As the general level of advances to the personal sector and particularly support decreases, the specific policy package is to the corporate sector in the first quarter of being altered, with an increasing emphasis on 1989. The expected trend in advances to the "social" goals. For example, cattle farmers' corporate sector is expected to continue in the income support is undergoing change (from April next quarter, whilst advances to the personal 1989); the old system of premium payments whereby sector are expected to remain moderate. There cattle farms received support that varied are indications that the proportion of increased depending upon time, demand and quality is now corporate credit used to finance investment, replaced by a single payment per animal, and is particularly on buildings, is weakening, and is limited to 90 animals per farm. This example expected to weaken further in the next quarter. illustrates one of the problems of support and And it is clear from the SCBS that credit demand other intervention measures; trade-offs can exist is shifting away from manufacturing and between economic efficiency and social objectives. distributive trades to other services. This The new policy seems to be aimed at directing increased demand for credit from other services is support in favour of small farms; but by removing expected to remain strong in the next quarter. an incentive to produce high quality produce, a reduction in the quality of the produced commodity To sum up, both the SCBS and the CBI survey may result.