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Productivity should be targeted

Scotland must move from ‘fragile to agile’

scottish economyProductivity is the key challenge for the Scottish economy and needs to be tackled head-on in a decade of disruptive global changes, according to a new report.

In From Fragile to Agile: A Blueprint for Growth & Prosperity‘, the Scottish Council for Development & Industry identifies key areas of underperformance in the Scottish economy – Productivity, Innovation and Internationalisation – and what needs to be done.

Key recommendations include:

  •  A Scottish Productivity Commission modelled on those of Australia and New Zealand, should provide independent research, advice and performance monitoring to government and all sectors, under the direction of the Council of Economic Advisers.
  • A network of TechHubs should be developed to bring together innovators, entrepreneurs and creatives with professional support in flexible, affordable and high-tech spaces in cities, towns and smaller communities – with opportunities for revitalising private and public sector property assets as economic changes and financial pressures drive “capacity exit” an immediate priority for policy and partnership support.
  • A genuine partnership on trade and investment activity to light up and capitalise on business/sectoral, civic and educational resources and relationships, maintain and improve our relationships in the EU and develop a Scottish ‘Commonwealth Plan’.
  • An independent Scottish Infrastructure Commission to recommend long-term priorities which develop the planned investment programme from catch-up to transformation of Scotland’s competitiveness, and integrates national and city region pipelines with a focus on smart and low carbon, and new legislation to fast-track delivery

Digitisation is a particularly high priority, and SCDI recommends that the first Chief Digital Officer for Scotland, reporting directly to the First Minister, should be appointed to progress Digital Scotland discussions from infrastructure to economic growth and public service improvements.

SCDI Chief Executive, Ross Martin, said:  “The opportunities and threats before Scotland from global disruptive changes are stark and our economy must make the transformation from fragile to agile. Productivity is the principal driver of growth, and to succeed we must collectively tackle this head-on, including by addressing the key economic challenges of innovation and internationalisation.

“This is not an agenda on which government can deliver alone – we all must take a lead. Underpinned by infrastructure, both physical and digital, the connection of place and the skills of our people, we must meet the challenge of an emerging economy if we are to secure a prosperous future for Scotland. SCDI’s Blueprint 2015 presents a vision of how together we could forge and attain that future.”

While the Blueprint generally takes a long-term perspective, SCDI also recommends that a ‘First 100 Days’ mentality can establish a tempo which generates a sense of clear and shared purpose, with early actions such as:

  • Agreeing and delivering City Regions Deals for Edinburgh and South East Scotland, Aberdeen City and Shire, and Inverness and Highland, following the lead of Glasgow and the Clyde Valley, which accelerate the reversal of 100 years of centralisation within the UK.
  • Launching a review to fundamentally reform the business rates system and introducing further reforms to the planning system to make both more reflective of, and responsive to, the changing economy, and supportive of investment into local growth and jobs.

SCDI emphasise the critical need throughout for substantially better information about what is happening in the Scottish economy, particularly with the devolution of more policy levers for the economy and revenue-raising, so we can all understand and optimise the effectiveness of our efforts across these priorities going forward, with robust, real-time and high profile Scottish and city region data.

The Blueprint has been developed following extensive consultation and research across the country with key stakeholders and members from the private, public and social economy sectors.

EY forecast

Scotland’s economy continues to grow at a slower and more ‘lopsided’ rate than the rest of the UK, according to a new report from the EY Scottish ITEM Club.

Output growth is now forecast at 1.9% for 2015, down from 2.2%, and 1.8% in 2016, according to the EY Scottish ITEM Club.

This compares with UK GDP growth rates of 2.5% and 2.4% in 2015 and 2016.

EY says the downward revision suggests that Scotland is suffering from lopsided growth.  The all-important services sector seems to be underperforming its UK peer by a wide margin, meaning that Scottish overall GDP growth is over-dependent on the rapid expansion in construction activity.

ITEM Club says this imbalance leaves the economy vulnerable for future growth, unless the performance of private services picks up.

Dougie Adams, senior economic advisor to the EY Scottish ITEM Club said: “Although Scotland has been impacted by the effects of lower oil prices on North Sea-related activity, weak growth in private services is a major cause of this year’s shortfall in comparison to UK growth.

“The private services sectors expected growth of 1.3 per cent in Scotland is well below trend and compares with growth of well over 3 per cent in the UK.  And, as in the UK, stalling world trade growth held back manufacturing.

 “This broad view conceals some bright spots. Water, electricity and gas, and chemicals are all expected to enjoy growth rates in excess of 5 per cent this year, while we anticipate retail and wholesale to record a pick-up in growth in 2015.”

Solid foundations

Scotland’s construction sector has been the stand-out performer with output up by an anticipated 14.6% this year.

A large part of these figures can be attributed to major construction projects such as the Forth Crossing, the Edinburgh-Glasgow Improvement Programme and the M8, M73, M74 enhancements.

Mr Adams said: “Construction represents around 6 per cent of the Scottish economy yet accounts for 40 per cent of GDP growth over the last two years. It is an impressive performance but one that may not be sustainable. What happens when the major projects come to an end and will these improvements to Scotland’s infrastructure drive up productivity in the longer-term?

“Scotland’s economy has been buoyed by the construction industry but this has created an overdependence of growth on this one sector. Scotland needs more balanced growth across the sectors in order to secure sustainable growth.

“With construction output expected to pull back to just 3 per cent in 2016, this means the forecast of continuing GDP growth requires a return to form in key areas such as professional and administrative services where growth is forecast to return to trend of about 4 per cent in 2016.  Other sectors expected to grow by more than 2 per cent include transport and communication, real estate, retail, accommodation and food.”

Building our cities

The EY Scottish ITEM Club 2016 Forecast also considers Scotland’s three largest cities.

Accounting for over 35% of total employment and 40% of business services employment, it highlights the importance of Glasgow, Edinburgh and Aberdeen to the overall health of the economy.

Glasgow and Edinburgh are both expected to experience an increase in employment for 2015 of 1.1% and 1.4% respectively. While growth in Glasgow for 2015-2018 is expected to be hampered by job losses in the public services sector, the city is predicted to turn in a relatively strong output growth figure of 2.1%, ahead of Scotland. Edinburgh is forecast a similar annual average increase of 2.2% with the fortunes of the financial services sector critical to this outcome.

Aberdeen has so far demonstrated resilience in the face of plummeting oil prices with employment for 2015 calculated at a 1.7% increase. However, unemployment has risen steadily since June and the full impact of the downturn in oil and gas has yet to hit.

Mark Harvey, partner and market leader for EY in Scotland, said: “While Aberdeen, Edinburgh and Glasgow are traditionally the main engine houses of growth, the cities of Inverness, Dundee, Perth and Stirling are also vital in their contribution.

“Ultimately, there is more for Scotland to achieve. The City Region Deal bids that Scotland has on the table provide an exciting opportunity for these centres to sculpt their future. We have witnessed the impact that investment has had to cities like Manchester and it is vital that Scotland continues to keep pace with its UK counterparts.”

Business confidence to invest underpins future forecast

2016 will witness modest employment gains for Scotland overall, with an additional 8,000 jobs (0.3% increase) expected, for which business services will be the main driver of employment creation.

Commenting on headwinds to domestic growth in 2016, Mr Adams said: “The noflation environment is likely to give way to gently rising prices again and the pace of the overall UK recovery looks like slowing, with knock-on effects to Scottish producers serving rest of UK markets.”

However, it is consumer expenditure growth and business confidence to invest that will underpin the 2016 forecast. Consumer spending growth of 2.1% is predicted for Scotland, ahead of both household income growth and the increase in GVA, supported by strong consumer confidence and continuing income gains.

Mr Harvey commented: “Considering the fragility and uncertainties of economies at home and abroad, the secret to Scotland’s future success is likely to be business confidence and the willingness of companies to invest. Providing confidence isn’t knocked by current global and local factors, much of the corporate sector is in great financial shape to undertake investment and lead Scotland’s economic growth going forward.”

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