Scotland Now in Recession – Official

LAST week we discovered – though no surprise really – that the UK was in recession, i.e. growth had stalled for two quarters in a row.  This week we learned (officially) that Scotland is also in recession.  Again, no big surprise given the lockdown.  For the record, the Scottish economy contracted by 19.7% in Q2, following a contraction in Q1 of 2.5%.

The first thing to note is that the situation north of the Border is pretty much the same as down south.  Given that the UK recession is deeper than elsewhere – only Spain among the EU or G7 economies performed worse – we have nothing to feel good about.  Clearly, since the same dynamic is at work in Scotland, which you’d expect given how integrated the two markets are – and given the same relative Treasury financial support.

Are things going to get any better and when?  We know from the latest data that the economy started to expand (a tiny bit) in May, then faster in June.  This coincided with the initial easing of the lockdown when more businesses were able to operate. The Scottish economy expanded by a reasonable 5.7% in June.  That was less than the UK figure (8%) but I doubt is the numbers are that reliable, so call it quits.

What all this tells us is that the fabled V-shaped recovery is nowhere to be seen.  We might get further growth in the third and fourth quarters, but at this rate we are not going to get back to normal anytime soon.  As I explained last week, whole sectors of the UK and Scottish economy have gone AWOL (e.g. foreign tourism) while consumers are still reluctant to spend, given the uncertainties regarding the pandemic and Brexit.

The latest ScotGov data reveals a bit more about what is going on.  Activities associated with tourism and hospitality (accommodation and food services) have been hit hardest, with a stunning 87% fall in output.  Recovery has been very modest despite Chancellor Sunak’s restaurant subsidy. Meanwhile, retail and transport has staged a reasonable recovery in the circumstances – though safety precautions are still having an impact.

Manufacturing output in Scotland is still down by a fifth, measuring the year till June.  I find this worrying.  The third quarter might see an improvement, but we’ll have to keep our fingers crossed.  When a manufacturer downsizes or closes, the economic pain can cause damage to a whole local economy.

This week bus manufacturer Alexander Dennis launched a consultation over plans to cut 160 jobs at its Falkirk works.  The company cited a “significant fall” in demand for new vehicles across the UK. It also plans to cut 200 jobs in Surrey and 90 in Scarborough. You won’t see those jobs easily replaced in the affected locality.

We do have some numbers for manufacturing as whole, for July.  Car dealerships have reported a jump in sales in July as customers rushed to find alternatives to public transport (which helps explain the difficulties Alexander Dennis has).  But probably this only helped to clear some of the backlog.

We also have the latest purchasing manager’s index (PMI) in manufacturing which is a gauge of confidence in future sales.  Anything above 50 means more sales.  The July UK PMI was 53.3, up from 50.1 in June and far above the record low of 32.6 seen in April.  In other words, manufacturers’ optimism is on the up, but that does not necessarily mean a return to normal.

Here in Scotland we also have the latest Fraser of Allander Scottish Business Monitor, which asks firms how they see the future.  While most firms think the next six months will be better than the previous six, they are worried about the unwinding of the Chancellor’s Job Retention Scheme and likely increased indebtedness.

Conclusion: manufacturing remains on the proverbial knife edge.   Witness the emergency funding talks between Tata and the Treasury to save the company’s UK Jaguar-Rover car plants and Port Talbot steel production.  So far, the Treasury has said no.  We’ll see who blinks first.

One curious thing that stands out in the latest batch of data is that Scottish businesses don’t seem to be making sufficient use of the Treasury’s Business Interruption Loan Scheme (CBILS).  By the start of August, firms in the UK regions and nations had applied for and received a total of £10.85bn in loans under the CBILS scheme.  That’s a fair bit of dosh towards meeting cash flow requirements.

Understandably, businesses in London received the biggest number of loans – 19% of eligible businesses receiving help. But in Scotland, a total of £588m was dispersed – with only 6% of the local business population applying successfully. Which suggests that English firms are making better use of the scheme or that it is more difficult to access the loans north of the border. Can someone in ScotGove or Scottish Enterprise please investigate.

As I predicted, Chancellor Sunak has launched his pet scheme for Free Trade Zones – a scam to cut taxes, customs duties, and planning regulations in designated areas.  In theory, this creates jobs but in practice it just moves employment to the mini tax haven.  The plan is to launch 10 FTZs after a post-Brexit deal trade deal has been finalised with the EU.

FTZs are a dog eat dog business and are designed to pit local communities against each other.  Sadly, Highland Council has fallen into the Tory trap.  A new body called Opportunity Cromarty Firth hopes to secure Treasury approval to create an FTZ.  As well as Highland Council, supporting agencies include Port of Cromarty Firth, engineering company Global Energy Group, Highlands and Islands Enterprise and the University of the Highlands and Islands.

Alasdair Christie, a Lib Dem and Highland Council’s depute leader, is quoted by the BBC as saying there is “significant potential” in the FTZ plan for the Highland region and its economic recovery.  Highland Council is led by a coalition Independents, Liberal Democrats Group and Labour, with the SNP and Conservatives in opposition.

FTZs are a political Trojan Horse designed to sneak in tax cuts and de-regulation. For a Scottish local authority to fall for this scam is sad.  For an administration supported by Labour, it is outrageous.  Can Richard Leonard please explain?
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