Scottish Government

Chapter One: Economic Accounts

GDP growth

Over the year ending in June 2006, Scottish GDP (Gross Domestic Product at Basic Prices) grew by 2.2 per cent against the previous year. The service sector was largely responsible for the overall growth, demonstrating an annual growth of 2.9 per cent. The production sector declined by 1.1 per cent over the same period and construction grew by 4.6 per cent. Within production, the manufacturing sector declined by 0.2 per cent. Mining & quarrying and electricity, gas & water supply also saw declines of 11.0 per cent and 2.4 per cent respectively.

Industry sectors with largest annual growth (to 2006 Q2)

Industry sectors with largest annual negative growth (to 2006 Q2)

Between 2000 and 2005, Scottish GDP grew by 9.2 per cent, equating to an average annual growth rate of 1.8 per cent. Chart 1.2 shows the change in annual growth rate since 1998 for production, services and overall GDP. Since 1999, the growth rate for GDP as a whole has remained around 1.5 to 2.5 per cent but has remained above 2.0 per cent for the last 7 quarters. Since the end of 2000, the production sector has experienced negative annual growth consistently over the period, largely due to the contraction of the electronics sector. The rate of decline in production exceeded 7% in the first 3 quarters of 2002 and is now showing signs of stability. Conversely, the service sector has acted to offset the decline in the production sector by showing strong annual growth consistently over the period reaching a peak of 5.3% in 2002 Q1 and Q2.

The service sector is the largest sector in the Scottish economy, accounting for 72 per cent of GDP, while production accounts for 19 per cent. Construction and agriculture, forestry & fishing contributing the least to the overall GDP (7.1 and 1.8 per cent respectively). The relative importance of industries to the economy as a whole has changed over time, with the service sector growing in importance and production, construction and agriculture, forestry & fishing reducing - see chart 1.3.

Chart 1.1: Scottish GDP index, 1995 Q1 - 2006 Q2

Source: Scottish Executive

Chart 1.2: Year on Year GDP growth, 1998 Q1 to 2006 Q2

Source: Scottish Executive

Chart 1.3: GDP Weights of main industries, 1995 and 2003

Source: Scottish Executive

Value of GDP

The above section describes the quarterly index of Scottish GDP at basic prices (known as Gross Value Added ( GVA) under ESA 95). This is produced by the Scottish Executive 17 weeks after the end of the relevant quarter, and provides an indicator of economic growth. It does not, however, provide a monetary value for GDP. An estimate of this in current prices is provided by the Office for National Statistics Regional Accounts. The Regional Accounts take UK totals from the National Accounts, and apportion these to the regions of the UK. Scottish GVA was estimated as £82 billion in 2004. Estimates for 1995 to 2004 are shown in table 1.2. Table 1.3 gives a breakdown by geographical ( NUTS 3) area for 1995 to 2003. The next release of Regional Accounts GVA data by ONS is expected in December 2006, and can be found on the ONS website at http://www.statistics.gov.uk/StatBase/Product.asp?vlnk=7359.

Supply and Demand

The Scottish input-output tables provide a detailed snapshot of the supply and demand linkages that exist within the economy. Table 1.4 shows that total Scottish output at purchaser's prices for 2002 was £150 billion. Of this, 31 per cent (£47 billion) was exported from Scotland, 31 per cent (£47 billion) was consumed by Scottish industries during their production process, 18 per cent (£27 billion) by consumers and 15 per cent (£22 billion) by government. Chart 1.4 shows that the picture is different for individual industries, with around 70 per cent of manufacturing products being exported, while almost 70 per cent of education, health and social work products are consumed by government.

Chart 1.4: Demand for domestic commodities, 2002

Source: Scottish input-output tables, 2002

Key to commodities shown in chart 1.4

The primary purpose of the Supply table (table 1.5) is to show the monetary value of goods and services (commodities) produced by each industry in Scotland in 2002, along with the supply of commodities through imports. The supply of commodities is presented in the rows while the columns show the industries responsible for the output of these commodities. The distinction between industries and commodities is important; individual firms and organisations are classified according to the products they make. If an industry produces more than one product, it is classified according to whichever product accounts for the largest proportion of its output. Each industry produces what is termed to be its principal product (shown in the diagonal elements in the table 1.5) and many industries also produce a range of other commodities referred to as secondary production (shown in the off-diagonal cells). Some industries such as Public Admin almost exclusively produce their principal product, whereas industries such as Distribution & Catering are more diversified.

The Domestic Use matrix (table 1.6) shows the purchases of commodities made by each industry required in order to produce its output, as well as the purchases of each domestic product by final markets. In 2002, the input-output GVA and Compensation of Employees were both constrained to the Office for National Statistics Regional Accounts at the 32 industry group level.

For the analysis of industry linkages and economic impacts, it is more meaningful to represent the Use matrix in Industry by Industry (IxI) (table 1.7) form, although a Commodity by Commodity matrix is also produced. The columns of the IxI matrix show purchases made by industries from each industry, and final demand for each Scottish industry's output arising from both principal and secondary production.

Industry Multipliers

The input-output model provides the tools to follow the final demand changes through the whole economy and estimate the total effect on the Scottish economy. It enables analysis of the effect of different types of changes in final demand, for example, the closure or opening of a company, an increase in consumer spending due to a change in (for example) disposable income, or an increase in exports. In addition, the input-output model includes sets of industry level multipliers, to reflect that the total impact on output will vary according to the industry which experiences the initial change in demand.

There are different types of effects, direct, indirect and induced. If there is an increase in final demand for a particular commodity, it can be assumed that there will be an increase in the output of that commodity, as producers react to meet the increased demand; this is the direct effect. As these producers increase their output, there will also be an increase in demand on their suppliers and so on down the supply chain; this is the indirect effect. As a result of the direct and indirect impacts, the level of household income throughout the economy will increase as a result of increased employment. A proportion of this increased income will be re-spent on final goods and services: this is the induced effect. The industry multipliers measure these impacts on each industry - Type I multipliers measure the direct and indirect effects, Type II multipliers also measure the induced effect.

Separate multipliers measure the effect of change in industry output, employment (number of FTE jobs) and income from employment. The output multiplier, and employment and income effects show the impact which a change in an industry's final demand would have on the total output, number of jobs, and income from employment throughout the Scottish economy. The income multiplier shows the increase in income from employment resulting from a unit increase in income from employment ( i.e. compensation of employees). The employment multiplier shows the increase in employment resulting from an increase in final demand sufficient to create 1 additional job ( FTE) in that industry.

There are a number of assumptions which are made in the production of industry multipliers. When looking at the effects of changes on the Scottish economy, the model assumes that output would be reduced in line with the reduction in demand. However, it is possible that, following the decrease in final demand for a product, an industry would use its spare resource to increase output of another product. In addition, the industry multipliers provide an estimate of the impact of change by assuming that the industries and consumers will follow current purchasing patterns.

The following hypothetical examples illustrate the effect which a change in the number of jobs and the final demand would have on two industries.

Example 1

A company opens in the "Computing Services" industry ( IOC 107), employing 100 people on a full-time basis. The creation of the 100 full time jobs is the direct impact, the number of jobs created by indirect and induced effects are calculated below.

• The increase in jobs due to direct and indirect effects is calculated by multiplying the direct increase in jobs (100 FTE) by the "Computing Services" Type I employment multiplier (1.559), giving 156 new full-time equivalent jobs. Subtracting the initial direct job increase gives the increase in jobs throughout the Scottish economy due to indirect effects as 56 ( FTE).
• The increase in jobs due to direct, indirect and induced effects is calculated by multiplying the direct increase in jobs (100 FTE) by the "Computing Services" Type II employment multiplier (1.973) giving 197 FTE jobs. As 156 FTE jobs are as a result of direct and indirect effects, it is estimated that 41 further jobs will be created as a result of this induced demand.

Example 2

The following example looks at the effect of an additional £5 million of exports to the Rest of the World by the "Manufacturing of Other Inorganic Basic Vegetables" industry ( IOC 37). The direct impact on the industry is an increase in total output by £5 million to meet this additional final demand. The other effects are calculated as follows:

• The change in output due to direct and indirect impacts is calculated by multiplying the direct output change (£5m) by the Type I output multiplier for this industry (1.142), giving an increased output of £5.71 million (of which £0.71 million would be due to indirect effects).
• The change in employment resulting from this additional output is calculated by multiplying the direct output change (£5m) by the Type I employment effect for this industry, giving 28 FTE jobs created directly and indirectly throughout the Scottish economy.
• If employment were to rise, it is expected that there would be an associated rise in household income as these new posts are filled. The income effects estimate the effect of the direct change in output upon household income in Scotland - this is calculated by multiplying the direct output change (£5m) by the Type I income effect for this industry (0.27) to give an estimate of £1.4m of the direct + indirect income changes resulting from this additional output.

Direct, indirect and induced effects can be estimated using the Type II multiplier, rather than the Type I multiplier in the above calculations.

The 2003 Input-output Tables are expected to be published on the 15 December 2006. These tables will be available at http://www.scotland.gov.uk/Topics/Statistics/14713/484. Further information about the Scottish Input-output tables can be obtained from Stevan Croasdale (stevan. croasdale@scotland.gsi.gov.uk) or Donna Hosie ( donna.hosie@scotland.gsi.gov.uk).

Scottish Exports

Introduction

The two main sources of published data on Scottish exports are the annual results from Scotland's Global Connections Survey ( GCS) and the quarterly index of Scottish manufactured exports. The GCS provides cash estimates of the value of export sales across all sectors of the Scottish economy, whereas the quarterly index serves as a time series of the changes in the level of manufactured export sales.

GCS estimates are available for the period 2002 - 2004, with the results of the 2005 survey planned for publication in December 2006. Tables 1.8 and 1.9 show the results from the 2004 survey by industry and destination.

The quarterly index of Scottish manufactured exports provides estimates of changes in the level of exports from manufacturing industries over time, adjusted for inflation. Table 1.10 gives data on this by industry.

A full range of export statistics from both sources can be found on the Scottish Executive web-site at www.scotland.gov.uk/ exports, along with background on estimation methodology.

All exports

• In 2004, total Scottish exports were estimated to be £17.5 billion, of which 70 per cent (£12.3 billion) were attributable to the production and construction sector, including manufacturing. It was estimated that the service sector accounted for £4.6 billion exports (26 per cent) with an additional £0.6 billion (3 per cent) being generated by primary sector industries.
• The top five exporting industries were food and beverages (£2.8 billion - of which alcoholic beverages accounted for 80 per cent), machinery (£1.8 billion), business services (£1.8 billion), chemicals (including petroleum products) (£1.7 billion) and radio/television and communication equipment (£1.4 billion). These industries together accounted for more than half of total exports.
• Manufactured exports were estimated at £12.2 billion (70 per cent of total exports) and accounted for nearly all exports in the production and construction sector. Within the manufacturing sector, the electronics industry as a whole (defined as SIC divisions 30-33) had estimated exports of £4.1 billion, accounting for 37 per cent of manufactured exports (24 per cent of total exports).
• The top exporting service sectors were business services (£1.8 billion - 37 per cent of total service exports), wholesale/retail & repairs and hotels & restaurants (£1.2 billion - 26 per cent of total services exports), financial intermediation (£0.9 billion -
  19 per cent of total service exports) and transport (£0.3 billion - 6 per cent of total service exports).
• The top destination for Scottish exports was USA, which accounted for an estimated £2.6 billion exports (15 per cent of total exports). The second largest exports destination was the Netherlands which accounted for an estimated £1.6 billion exports (over 9 percent of total exports) closely followed by Germany which also accounted for an estimated £1.6 billion exports (9 per cent of total exports) .
• The top five export markets ( USA, Netherlands, Germany, France and Spain) accounted for £7.8 billion of exports (45% of all exports) from Scotland.

Manufactured Exports

Scottish manufactured exports sales fell by 0.8 per cent in real terms in 2006 Q2 but grew by 1.3 per cent over the year to 2006 Q2.

Over the year, the main industry contributing to the growth in manufactured export sales was mechanical engineering with an annual rise of 16.6 per cent, followed by metals (+20.8%) and drink (+2.9%). The industries showing a decline in real terms over the year were electrical and instrument engineering ( E&IE) (-3.9%), food and tobacco (-8.9%) and chemicals (-1.2%). All other industries grew over the year.

Over the quarter, the main industry driving the decline in manufactured export sales was electrical and instrument engineering ( E&IE) with a quarterly decline of 2.3 per cent, followed by chemicals (-4.3%), and mechanical engineering (-2.9%). The main industries showing growth in real terms were metals (+7.5%), drink (+0.9%) and textiles, fur and leather (+5.3%).

Since 2000 Q4 (the last peak), the level of manufactured export sales has fallen by 35.6 per cent in real terms. This represents an average quarterly decline of 2.0 per cent. Chart 1.6 displays the scale of the decline since this point and indicates the position has broadly stabilised since 2003 Q3. The fall in total manufactured exports has been largely driven by the decline in the electrical and instrument engineering sector, which has fallen by 66.4% since 2000 Q4. Excluding the E&IE, manufactured exports have grown by 8.9 per cent since 2000 Q4.

Chart 1.5: Scottish Exports by grouped Industry Sector, 2004 ^p

Source: Scotland's Global Connections Survey 2004
Notes: ^pFigures are based on provisional data
Percentages have been rounded and may not sum to 100

Chart 1.6: Index of Manufactured Exports, 1995 Q1 - 2006 Q2

Source: Scottish Executive