Quarterly
Economic
Commentary
we gratefully acknowledge the contribution of the Buchanan and Ewmg Bequest
OBITUARY
The s t a f f of the Fraser of Allander I n s t i t u t e learned with great sadness of the death of Sir Hugh Fraser on 5 May. The I n s t i t u t e has been generously funded by the charitable trust s e t up by Sir Hugh's family, whose name i t bears. I t i s less well-known that the i n i t i a t i v e for the establishment of the I n s t i t u t e came from Sir Hugh himself, and that i t was at h i s own suggestion t h a t the I n s t i t u t e ' s f i r s t research project was undertaken. This was the preparation, in co-operation with the S c o t t i s h Council (Development and Industry) and with IBM's United Kingdom Research Centre, of the f i r s t - e v e r s e t of input-output t a b l e s for Scotland. Despite the authority which h i s experience of the world of business had given him, - only a short time earlier, Sir Hugh had been chosen by The Guardian newspaper as i t s Young Businessman of the Year - a t no time did he attempt to influence the opinions or views of the I n s t i t u t e ' s staff. We are proud to salute a kind and disinterested benefactor; we should l i k e t o believe t h a t the achievements of the I n s t i t u t e which he did so much to c r e a t e were a source of satisfaction to Sir Hugh.
FRASER of ALLANDER INSTITUTE
The Fraser of Allander Institute for Research on the Scottish Economy was established in the University of Strathclyde on 1 January 1975, as the result of a generous donation from the Hugh Fraser Foundation. I t s p r i n c i p a l function i s to carry out research on the Scottish economy and i t s research programme includes the analysis of short term movements in economic activity. Along with the Quarterly Economic Commentary the Institute also publishes a series of Research Monographs and a series of Discussion Papers to provide an outlet for original research on medium term and long term aspects of the Scottish economy. The I n s t i t u t e i s a research unit in the Strathclyde Business School, a faculty of the University of Strathclyde.
Information for subscribers
The Quarterly Economic Commentary i s published in February, May, August and November. Annual subscription r a t e s are £20.00, or £5.50 per s i n g l e i s s u e . Queries should be addressed to the Secretary, the Fraser of Allander Institute.
Notes to contributors
The e d i t o r s welcome c o n t r i b u t i o n s to the Briefing Paper, Feature A r t i c l e and Economic Perspective s e c t i o n s . Material submitted should be of i n t e r e s t to a predominantly Scottish readership and w r i t t e n in a s t y l e i n t e l l i g i b l e t o a n o n - s p e c i a l i s t audience. F o o t n o t e s and r e f e r e n c e s should conform t o r e c e n t i s s u e s of t h e Commentary. Contributions should be typed and two copies submitted to the Scottish Editor.
Commentary Team
E d i t o r s : B r i a n A s h c r o f t (UK and G e n e r a l ) and Jim Walker,
TSB Fellow (Scottish)
C o n t r i b u t o r s : S t e p h e n Boyle, Paul D r a p e r , Frank H a r r i g a n , John Heeley, I a i n J e n k i n s , Cliff Lockyer, Jim H Love, Peter McGregor, I a i n McNicoll, Roger Perman, David Simpson and Jim Stevens.
Graphics: Stephen Boyle
Production: Sheelagh Blackhall and Isobel Sheppard
The Fraser of Allander I n s t i t u t e Curran Building
100 Cathedral S t r e e t GLASGOW G4 0LN
QUARTERLY ECONOMIC COMMENTARY
» » * » . COMMEMTARY « « • « «
OUTLOOK AND APPRAISAL 1
THE WORLD ECONOMY 4 THE BRITISH ECONOMY 8
M a c r o e c o n o m i c Trends 8
Labour Market 11
THE SCOTTISH ECONOMY
I n d u s t r i a l Performance 18 The S e r v i c e S e c t o r 41 Labour M a r k e t 46 Regional Review 59
» « « » « VIEWS • • • • •
BRIEFING PAPER
Scotland's Export Performance - a closer look
by Mark Cox 63
ECONOMIC PERSPECTIVES
1. Making Tracks: Caterpillar's Crawl from Scotland
by Nigel Haworth 67 2. Scottish Tourism - Premier League Charms
but Second Division Attractions
by John Heeley 72 3. Accountability and Regional Control:
Options for Reform
by C Moore and S Booth 75
INDEX Vols 9-11 80
Opinions expressed in signed c o n t r i b u t i o n s are those of the authors and not necessarily those of the Fraser I n s t i t u t e
Outlook and Appraisal
The outlook for the Scottish economy i s favourable over the coining months, but probably less favourable than the outlook for the UK economy as a whole.
Recent evidence provided by the London B u s i n e s s School on t h e u n d e r l y i n g performance of the OK economy, suggests that during 19-86 the economy began to grow above i t s trend r a t e a f t e r a period of below trend growth from l a t e 1984. We expect t h a t during 1987 the growth r a t e will improve further relative to trend and probably peak in the middle to l a t e 1988. However, there i s the worrying possibility that the inflation rate may be rising to a l e v e l w h i c h c o u l d f r u s t r a t e t h i s prediction.
Unlike the 1970s and early 1980s when output a c t u a l l y rose and f e l l over the duration of the cycle, recent c y c l i c a l movements have o c c u r r e d a g a i n s t a background of continuing positive growth. The B r i t i s h economy i s now entering i t s s e v e n t h y e a r of p o s i t i v e g r o w t h , suggesting that the cyclical behaviour of the economy may now have reverted t o the experience of the 1960s when c y c l i c a l movements represented successive periods of above and below trend growth rather than r i s e s and f a l l s in the l e v e l of output. If t h i s in f a c t proves to be the case, the explanation of the change would appear to l i e in the absence during the 1980s of the external shocks to the UK economy which characterised the 1970s, p a r t i c u l a r l y the o i l price increases in 1973/74 and 1979/80.
In o t h e r r e s p e c t s , though, r e c e n t experience d i f f e r s from t h a t of the 1960s. During 1986 the UK experienced f a s t e r economic growth than the major
European economies and in 1987 i t s growth could exceed t h a t of the US and Japan. The r e a s o n s for t h i s improvement in B r i t a i n ' s r e l a t i v e economic performance are l e s s than straightforward.
In the 1970s, B r i t a i n ' s economic cycle broadly moved in l i n e with the cycle in the OECD countries. The major difference between t h e UK and world economic performance being t h a t t h e c y c l i c a l pattern of UK upswings and downswings was more p r o n o u n c e d . From 1979, t h e combination of the deflationary effects of t h e o i l p r i c e r i s e , and the sharp appreciation of s t e r l i n g , reflecting i t s new-found status as a "petrocurrency" and monetary c o n t r a c t i o n , produced a severe recession as i n d u s t r i a l output f e l l 6.8% below t h a t of 1978. The r e c e s s i o n occurred more quickly and was therefore i n i t i a l l y more severe than the recession in the r e s t of the world, but by 1982 the OECD c o u n t r i e s were experiencing a more pronounced recession while the UK had already embarked on an upward growth path. In view of the experience of the 1970s, and the earlier UK recession and upturn in 1981/82, i t might therefore have been expected t h a t following the UK peak in 1984/85 t h e r e would have followed a sustained period of below trend growth at a time when other i n d u s t r i a l countries were either s t i l l in the upswing of their c y c l e , or in t h e e a r l y s t a g e s of a downturn. This did not happen. A trough was reached in l a t e 1985 e a r l i e r than might have been expected at a higher rate of growth, and the economy reverted during 1986 to growth a t , or above, trend, with the possibility that the trend itself may have shifted in favour of higher potential growth.
The main forces underlying the improvement in Britain's economic growth have been the strong growth in consumer spending and, perhaps more importantly, the recent
s t a t i s t i c cotihued t o f a l l . I t should f i r s t be remembered t h a t unemployment t a k e s t i m e t o respond t o changes i n economic activity. When economic activity expands adjustments are f i r s t made t o l a b o u r demand w i t h i n f i r m s ' i n t e r n a l labour markets before employment increases as workers a r e hired from the external labour market (see Labour Market section). Even then registered unemployment may not fall because the new jobs may be filled by workers moving from one job t o another, by migrants from other regions, or by labour s u p p l i e d from the n o n - r e g i s t e r e d or " h i d d e n " u n e m p l o y e d . R e g i s t e r e d unemployment w i l l be affected but only a f t e r a lag of perhaps nine months or more. On t h i s b a s i s t h e e f f e c t s of improved UK economic growth should now be beginning t o a f f e c t the unemployment register.
However, i t i s clear that the recovery in economic activity in Scotland i s lagging behind t h a t of the UK. Furthermore, the harmful e f f e c t s of the o i l - p r i c e f a l l on the oil supply industry have been largely localised in Scotland and while the worst i s over the impact i s s t i l l coming through t o t h e unemployment r e g i s t e r . In addition, the twelve major redundancy announcements between November and the end of January, which were discussed in the February Coamentary, have s t i l l t o r e g i s t e r t h e i r f u l l i m p a c t on unemployment. An a n a l y s i s of t h e unemployment flows on t o and off the register in Scotland compared with the UK, shows that in the three months to January, when unemployment was s t i l l r i s i n g in Scotland while falling in the UK, the rate of inflow on t o the r e g i s t e r rose in Scotland compared t o the UK, while the r a t e of outflow rose, as in November, or remained broadly the same as t h a t in the UK. This might superficially be taken as indicating t h a t by the end of 1986 the benefits of increased training programmes and improved UK growth were affecting the general demand for labour in Scotland to some degree, but the downward e f f e c t on unemployment was more than offset by the inflow of redundancies due to the special circumstances that affected p a r t s of the Scottish economy last year.
If there i s any substance to t h i s argument then we should e x p e c t i n c r e a s i n g l y favourable e f f e c t s on the labour market and hence unemployment in Scotland but o f f s e t to some extent by the diminishing impact of l a s t y e a r ' s shocks. For these reasons the outlook for the Scottish economy and the labour market in Scotland i s expected t o be favourable over the coming months, but l e s s so than t h a t in the UK. F i n a l l y , i t must be remembered that recovery in Scotland i s starting from a much lower base than in the country as a whole; t h a t the longer-run forces tending t o increase regional imbalance in the UK should not be forgotten since the evidence shows that in acyclical upturn there i s a narrowing of the imbalance around the long-run trend; and t h a t the prospects for further growth in both Scotland and the UK depend crucially on what happens to the r a t e of i n f l a t i o n . There i s s t i l l a long way t o go.
