Scotland in the Global Economy

1. Scotland in the Global Economy David Fenton & Stephen Boyle

2. 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?

3. Scotland in the Global Economy The Great Recession by numbers

4. 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

5. 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

6. 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

7. 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)

8. Scotland in the Global Economy What next?

9. Why forecasting is risky, especially now • Consensus forecasts of G7 GDP growth in 2009 made in August 2008 Source: Consensus Economics

10. Why forecasting is risky, especially now • Consensus forecasts of G7 GDP growth in 2009 made in August 2008 & actual H1 data Source: Consensus Economics

11. 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

12. Is Scotland at a turning point? Higher output Lower output Source: Markit Economics

13. 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

14. Household deleveraging Save Income Spend LR AVERAGE £4 £96 Q1 2008 £105 -£5 FUTURE? £92 £8 Source: Datastream and RBS calcs

15. 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.

16. Scotland in the Global Economy Life beyond the recession

17. 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?

18. 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

19. 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

20. 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

21. Below trend growth means unemployment keeps rising • Divergence of growth from trend & change in unemployment Source: Datastream

22. Below trend growth means unemployment keeps rising • Divergence of growth from trend & change in unemployment Source: Datastream

23. Scotland in the Global Economy Two challenges for Scotland

24. We are a mid-table performer

25. 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

26. Labour force: benefits of early intervention

27. 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

28. 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

29. Scotland in the Global Economy Any other questions?

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