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Scotland in the Global Economy David Fenton & Stephen Boyle What you can expect from us this morning Life beyond the recession: back to business as usual? The Great Recession by numbers: what’s happened? Two challenges for Scotland: economic growth & the public finances What next?

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scotland in the global economy

Scotland in the Global Economy

David Fenton & Stephen Boyle

what you can expect from us this morning
What you can expect from us this morning

Life beyond the recession: back to business as usual?

The Great Recession by numbers: what’s happened?

Two challenges for Scotland: economic growth & the public finances

What next?

scotland in the global economy3

Scotland in the Global Economy

The Great Recession by numbers

the great recession by numbers gdp
The Great Recession by numbers: GDP
  • Peak-to-trough decline in GDP
  • National income down 5.6% over the 1½ year to Q2 2009.
  • Twice as bad as the early 1990s; on a par with the 1980s.
  • More positively, overwhelming majority of economic activity continued despite the “worst ever” financial shock.

Source: Datastream

the great recession by numbers asset prices
The Great Recession by numbers: asset prices
  • Property prices (Jan 2000=100)
  • Large, long increase in house prices. Peak-to-trough decline of 19%, with rally over late-spring/summer
  • Commercial property values down by 44%. Tentative signs of stabilisation around 1997 levels.
  • FTSE all-share fell 44%, but has also rallied, rising 22% from trough in February. Still down by 32%

Source: Datastream

the great recession by numbers scotland
The Great Recession by numbers: Scotland
  • Growth in GVA (y/y)
  • First recession for almost 30 years; the worst since records began in 1963.
  • Similar depth to UK – it’s not usually like that
  • Broad-based, but 3 sectors stand out: construction; manufacturing; and business services & finance.

Source: Scottish Government

the great recession by numbers global
The Great Recession by numbers: global
  • Cumulative fall in GDP/GVA (y/y)
  • UK and Scotland have fared better than some, worse than others.
  • Generally speaking, the “thriftier” nations have endured a deeper recession (Germany & Japan).
  • Has mainland Europe already turned the corner? What about the UK?

Source: Datastream and Scottish Government. Up to Q2 2009,, except * (Q1)

why forecasting is risky especially now
Why forecasting is risky, especially now
  • Consensus forecasts of G7 GDP growth in 2009 made in August 2008

Source: Consensus Economics

why forecasting is risky especially now10
Why forecasting is risky, especially now
  • Consensus forecasts of G7 GDP growth in 2009 made in August 2008 & actual H1 data

Source: Consensus Economics

is the uk at a turning point
Is the UK at a turning point?

% of companies saying that, compared to a month ago, business levels are...

Service sector

Manufacturing sector

Source: Markit Economics

is scotland at a turning point
Is Scotland at a turning point?

Higher output

Lower output

Source: Markit Economics

uk economy indebtedness

36%

24%

16%

86%

16%

22%

12%

70%

52%

UK economy indebtedness

Debt-to-GDP ratio

140%

120%

100%

80%

60%

40%

20%

0%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Households (secured)

Households (consumer credit)

Companies

Source: Datastream

household deleveraging
Household deleveraging

Save

Income

Spend

LR AVERAGE

£4

£96

Q1 2008

£105

-£5

FUTURE?

£92

£8

Source: Datastream and RBS calcs

implications for the economic outlook
Implications for the economic outlook
  • Over the next 3 years we are set to save more and spend less.
  • Recovery likely to be more subdued than past experience.
  • Risk of a “double dip” casts a sizeable shadow.
  • Exports will have to be higher, or income will have to be lower still.
scotland in the global economy16

Scotland in the Global Economy

Life beyond the recession

key questions
Key questions
  • Will we see deflation?
  • Or will inflation return to haunt us?
  • What is the outlook for the public finances?
  • Unemployment: Ashes to Ashes?
indebtedness at a 33 year high
Indebtedness at a 33-year high

UK public sector net-debt-to-GDP ratio (%)

60

50

40

30

20

10

0

1974-75

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

Total

Excl financial sector interventions

Source: ONS

this could get expensive
This could get expensive

Net present value of impact on fiscal deficit of crisis and age-related spending to 2050

For every £1 the UK spends on the crisis, it will spend £12 on ageing-related costs

Source: IMF

a growing burden on fewer shoulders
A growing burden on fewer shoulders

Number of Scottish men and women of working age (20-64) per person aged 65 or above

2

1

0

2006

2016

2026

2036

Source: GAD

below trend growth means unemployment keeps rising
Below trend growth means unemployment keeps rising
  • Divergence of growth from trend & change in unemployment

Source: Datastream

below trend growth means unemployment keeps rising22
Below trend growth means unemployment keeps rising
  • Divergence of growth from trend & change in unemployment

Source: Datastream

scotland in the global economy23

Scotland in the Global Economy

Two challenges for Scotland

how to decide what to do
How to decide what to do?

What’s your view about what makes economies grow?

  • Growth of the labour force
  • Productivity growth

What makes productivity grow? A mix of

  • Macroeconomic conditions – especially stability
  • Enterprise – business start-ups and failures, business ‘churn’
  • Labour force – number & quality of people
  • Physical capital – infrastructure, machinery, buildings
  • Competition – more is generally better
  • Innovation – inventing or adopting
scotland s public finance challenge
Scotland’s public finance challenge
  • Put bluntly, it is unlikely that there will be any real increase in the resources to support Scottish Government spending programmes over the next five years,

Professor David Bell, report for Scottish Parliament Finance Committee

  • The Scottish Government now faces unprecedented change in relation to its budgetary future. Such a future may therefore require previously unprecedented changes in policy thinking and funding arrangements in order to steer a way through ...”

Professor Richard Harris, Centre for Public Policy and the Regions

how do we meet the challenge
How do we meet the challenge?
  • David Bell’s paper identifies these options
    • Withdraw service provision – stop doing things
    • Increased rationing – less provision to fewer people
    • Charge for services – prescriptions, transport, care for the elderly, education?
    • Raise taxes – Scottish Variable Rate = “The Tartan Tax”
    • Cut costs – wages are approximately 60% of the Scottish Government’s costs
  • CPPR’s emphasis is on the process of prioritisation
    • Creation of a “Scottish Treasury” function
    • Emphasis on generating & using evidence, e.g. monitoring & evaluation
  • Two issues for you for the rest of this week
    • How would you determine priorities?
    • What decisions would you reach
scotland in the global economy29

Scotland in the Global Economy

Any other questions?

disclaimer
Disclaimer

This material is published by The Royal Bank of Scotland plc (“RBS”) which is authorised and regulated by the Financial Services Authority for the conduct of regulated activities in the UK. It has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments, other financial instruments or related derivatives (“Securities”). It should not be reproduced or disclosed to any other person, without our prior consent.

This material is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation, express or implied, nor does it accept any responsibility or liability of any kind, with regard to the accuracy or completeness of this information. Unless otherwise stated, any views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the RBS Group’s Group Economics Department, as of the date of publication of this material and are subject to change without notice. Recipients of this material should make their own independent evaluation of this information and make such other investigations as they consider necessary (including obtaining independent financial advice), before acting in reliance on this information.

This material should not be regarded as providing any specific advice. RBS accepts no obligation to provide any advice or recommendations in respect of the information contained in this material and accepts no fiduciary duties to the recipient in relation to this information.