Forecasts of the Scottish economy [June 2011]

Allan, Grant (2011) Forecasts of the Scottish economy [June 2011]. Fraser of Allander Economic Commentary, 35 (1). pp. 18-29. ISSN 2046-5378

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We revise down our forecast for GVA growth in 2011 from 1.0% to 0.8%. This is due to three factors: weak domestic demand; low investment activity and slower growth in world trade than was expected earlier this year. Firstly, there is ongoing weakness in consumer confidence, in turn damaged by falling real incomes for households due to rising inflation rates impacting on spending power. Reduced real government spending on current and capital expenditures are due to impact on the Scottish economy particularly from April 2011, and the impact that this has on employment and activity in the public sectors will be critical for the short-term outlook. Business investment spending appears relatively static from previous periods, but will depend on expected demand as well as the availability of finances to undertake investment. To the extent that external finance sources remain challenging, internal financing will require the corporate sector to build up balance sheet strength. External demand remains slow, with lower growth forecasts for the UK economy as a whole (the largest market for Scottish exports) and weaknesses across the Euro area driven by sovereign debt concerns and major questions about the future path of this economic area. The outlook for the Scottish labour market remains poor, with the link between economic activity and employment growth uncertain, at the same time as some evidence of workers exiting the labour market to inactivity.