1.3 Selected Sectoral Performance
1.3.1 Introduction
The section below discusses recent performance and longer-term trends in a selection of the key sectors of the Scottish economy. While the performance of all parts of Scotland's economy is interlinked, individual sectors have distinct characteristics and face particular domestic and external influences. These factors lead to differences in growth, output and employment performance.
1.3.2 Real estate and business services
The Real Estate and Business Services sector in Scotland encompasses a diverse range of industries, ranging from commercial renting and computer services to accounting and legal activities. The most recent data show that the sector has grown by 1.7 per cent over the quarter and by 5.0 per cent over the year to 2006 Q2. Between 2000 Q1 and 2006 Q2, growth in the sector increased by 39.5 per cent, more than three times as fast as the total economy (12.0 per cent). Moreover, employment in the sector has grown strongly, increasing from 244,000 in 1998 to 306,000 in 2004, equivalent to 13 per cent of all Scottish employment.
As Chart 1.20 illustrates, Other Business Services which includes legal, book keeping and consultancy services is the largest single component of the sector, accounting for almost 75 per cent of employment. However, the strongest growth has occurred in the Real Estate sector, with employment increasing by 77 per cent between 1998 and 2004. Such strong growth is not surprising - the sustained increase in Scottish house prices over the period is likely to have increased both the demand for rented accommodation and the number of people investing in the property market.
Chart 1.20: Employment in Real Estate and Business Services Sub-sectors
Source: Annual Business Inquiry
Like many areas of the service economy, exports of Real Estate and Business Services are comparatively low. In 2004, exports to locations outside the UK stood at £1.8 billion, the vast majority of which were from the Business Services sub-sector. This means that around 10 per cent of the sector's turnover comes from exports. This relatively low level of export intensity may be due to the fact that many of the services within the sector require interpersonal contact and are consequently less mobile than the goods produced in other areas of the economy, such as manufacturing. Furthermore, some business services such as legal services cannot be easily exported due to differences in legal systems between countries. However, the sector's share of total Scottish exports has increased slightly between 2002 and 2004. As a result of falling telecommunication costs and continued improvements in ICT, it is possible that global mobility of business services will increase, and that the sector's share of exports will grow.
The sector also plays a vital role in supporting some of Scotland's key industries. For example, the success of companies in Scotland's financial services sector depends in part on their ability to access supporting functions in areas such as accountancy and legal services. Similarly, to attract geographically mobile investment it is essential that Scotland can offer the supporting services these companies require. This is particularly true if Scotland is to retain and attract further headquarter functions, as it is often these enterprises which make the greatest use of external business services.
Box 1.3: Potential Economic Impact of a Regional Casino in Scotland |
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The Gambling Act 2005 allows for the creation of three new types of casino in the UK, including a single regional "super" casino. A number of local authorities in Scotland applied for the right to host the regional casino, with Glasgow being included on the final shortlist of potential UK locations. Despite the investment and job creation that a regional casino would generate, the balance of evidence is currently unclear as to whether such a project would produce a significant national (Scotland-wide) economic benefit. The key issue in determining the net economic impact is the extent to which a new casino is dependent wholly on the Scottish market and thus the extent to which it simply displaces expenditure elsewhere in the economy. If demand for a regional casino comes solely from Scottish residents or existing tourists with fixed total expenditure then the project would have a neutral effect as the casino would simply be redistributing income which would have otherwise accrued to other sectors in Scotland. To stimulate Scotland-wide income, it would have to attract new tourists from outwith Scotland, encourage more spending by existing tourists or induce Scottish residents to substitute expenditure on foreign travel for trips to a domestic casino. Whilst the balance of evidence is unclear as to whether there would be significant national (Scotland-wide) economic benefit from a regional casino there is a stronger case for expecting such a project to have a positive economic impact for the local area or region in which it is located. Discussions with potential investors suggest such a regional-type casino in Scotland could create in the range of 1,500 to 3,000 direct jobs in the immediate area and lead to a substantial investment programme which could have wider regional development benefits and the potential to create further indirect jobs. Table 1.2 summarises activity in the Gambling and Betting sector in Scotland over the period 2002 to 2004. Strong domestic demand in the sector, as reflected by the significant growth in turnover during the period, suggests that casino patrons would be drawn from across Scotland. Even in the scenario that expenditure would be displaced from other regions in Scotland (100% crowding out), resulting in a broadly neutral national outcome, it could be expected to have significant positive economic benefit locally and support a significant number of jobs. Therefore the investment could be used to help regenerate a particular area of Scotland. Table 1.2: Summary of the Gambling and Betting Industry in Scotland, 2002-2004 | No. of business sites | Employment | Turnover (£millions) |
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Scotland | 2002 | 2003 | 2004 | 2002 | 2003 | 2004 | 2002 | 2003 | 2004 |
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1,060 | 1,015 | 1,100 | 10,040 | 9,570 | 10,110 | 981 | 1,708 | 2,584 |
Source: Scottish Executive, ONS ( IDBR) A report by the Centre for the Study of Gambling and Commercial Gaming on behalf of Scottish Enterprise 18 on the location and licensing of casinos in Scotland presented a number of arguments in favour of very large projects, located away from city centres, which enhance tourism infrastructure and have more non-gambling add-ons (add-ons are investments in public interest projects furthering tourism or regional regeneration which casino companies make not to increase their earnings but in order to secure a licence). It also suggested that new casinos in Scotland could support around 8,000 jobs (though this was estimated on the basis of a number of casinos), and while the net increase would be around half of this due to displacement of other employment, a significant number of indirect jobs could also be generated as those working in casinos spend their earnings in the local economy. It is important also to consider the potential social impacts of gambling. Research 19 on the subject, commissioned by the Scottish Executive, reported that while proximity to casinos can increase rates of problem gambling there are strategies that can be used to address and minimise this. |
1.3.3 Financial Services
Scotland's Financial Services sector has continued to outperform the wider economy. GDP grew by 2.0 per cent over the quarter and by 7.9 per cent over the year to 2006 Q2, and has now increased by 57.0 per cent since 2000 Q1. As the chart below illustrates, this strong growth has been largely driven by the Banking sector in recent years with GDP in the sector increasing by 7.6 per cent in the year to 2006 Q1.
Employment in the Banking sector has also grown strongly, increasing by almost 70 per cent between 1998 and 2004. In total, Banking now accounts for over 60 per cent of Financial Service jobs in Scotland. The strong growth in Banking employment seen in Scotland has not been matched in the UK as a whole where its level of employment has grown by just 3.5 per cent between 1998 and 2004.
Chart 1.21: GVA index, selected sectors (1998 Q1-2006 Q2)
Source: Scottish Executive
1.3.4 Manufacturing Sector
Overview of Recent Performance
Despite recent difficulties, Scotland's manufacturing sector still plays a significant role in the Scottish economy. The sector accounts for 15.1 per cent of GVA, 10 per cent of total employment, and around 70 per cent of total exports.
The latest ABI data show that Gross Domestic Product ( GDP) in the manufacturing sector was £12.4 billion in 2004. More recently, the GVA index shows that output in the sector fell by 0.2 per cent over the quarter and year to 2006 Q2. After experiencing robust growth of 0.6 per cent in the final quarter of 2005, this is the second successive quarterly decline that the sector has experienced. However, it should be noted that the sector has been broadly stable since 2003 Q2, indicating that the considerable declines that were experienced from 2000 onwards have begun to level off.
Chart 1.22: Manufacturing GVA Index 1998 Q1-2006 Q2
Source: Scottish Executive
From an export perspective, the most recent data show that, despite a decline of 0.8 per cent over the quarter, manufacturing exports were up 1.3 per cent over the year to 2006 Q2. This constituted the first annual increase for five years. In line with overall output in the manufacturing sector, the decline in the export index has been a medium-term trend; there is evidence that a small recovery began in the second half of 2005, and has continued into early 2006. The value of Scotland's manufactured exports in 2006 Q2 was just 67 per cent of the level in 2000. One significant reason for a positive performance over the year is the growth of the engineering & allied industries, which was previously the main driver of the decline. This, coupled with the continued positive performance of the food, drink and tobacco sector have led to the index expanding overall.
Despite output in the sector showing signs of stability, manufacturing employment has continued to fall. Employment in the sector fell by 3 per cent during 2004 to stand at 235,000. Manufacturing investment, as measured by Net Capital Expenditure ( NCE), also fell for the fifth consecutive year. It now stands at £782 million having fallen by around 55 per cent in real terms since 2000. This fall is partly explained by the very high levels of capital investment by electronics companies in the mid-nineties and the subsequent decrease in investment during the last few years as a result of the global downturn in the sector. In total, electronics accounts for over half of the decline in manufacturing NCE between 2000 and 2004.
International and Historical Context
Whilst the Scottish manufacturing sector has not performed as strongly as the rest of the economy during the past few years its performance must be seen in both a global and historical context. Internationally comparable data are generally published with a considerable lag and some of the variations will be due to differences in data collection techniques. Nevertheless, as Chart 1.23 clearly illustrates that manufacturing's share of employment has declined significantly since the 1970s in most developed countries, with the same trend true for output shares as well. The chart also demonstrates that the contribution of manufacturing to the Scottish economy is broadly similar to that in the other countries listed.
Chart 1.23: Manufacturing's share of employment
Notes: French data is for 1970 and 2002. German data for 1970 is for West Germany only. UK data is for 1971 and 2003. G7 average is unweighted.
Source: Scotland- ABI and Census of Employment
All other countries - OECDSTAND Database
It is also important to highlight that while the manufacturing share of overall output has declined since the 1970s, absolute output in the sector has continued to grow. As the chart below illustrates, Scottish manufacturing GDP was 8 per cent higher in 2004 than in 1973 despite employment falling by over 60 per cent. This trend has been even more pronounced since the start of the 1980s.
Chart 1.24: Employment in Manufacturing
Source: Scottish Executive
A key explanation for the marked contrast in manufacturing employment and output is the strong productivity growth which has occurred in the sector. As Chart 1.25 illustrates, manufacturing productivity grew at a faster rate than overall productivity in all G7 economies between 1980 and 2003. In the UK for example, average annual manufacturing productivity growth was 68 per cent faster than in the economy as a whole over this period. It is not possible to compare the relative productivity growth of Scotland's whole economy to the manufacturing sector over this time period. However, analysis of the ABI does show that average annual productivity growth in Scotland's manufacturing sector between 1980 and 2003 broadly matched that of the UK.
The strong productivity growth seen in the manufacturing sector implies that manufacturers have had a greater opportunity to substitute labour for capital relative to other sectors in the wider economy. Through the adoption of new technologies and more efficient production techniques, manufacturers have been able to maintain, or even increase, output whilst reducing their number of employees. While companies in the wider economy have clearly also utilised new technologies, many service sector jobs are customer facing and there is thus less scope to increase the level of automation.
Chart 1.25: Average Annual Productivity Growth 1980-2003
Notes: French data is from 1980 to 2002. German data is for 1991 to 2003.
Source: The OECDSTAN Indicators database
A second factor which may explain the diverging trends of manufacturing employment and GDP is the emergence of manufacturing locations in Eastern Europe and Asia. The comparative advantage of these regions has stemmed from their low labour costs, owing in part to their abundance of labour. As such, it is the low value, labour intensive manufacturing industries which have seen the largest job losses in most Western economies. Therefore there has been a disproportionate impact on employment levels relative to overall output.
Of course, the loss of manufacturing employment can be intensely difficult at an individual level, but this should not be interpreted as an indication of economic weakness. Through increasing labour productivity and moving into higher value sectors - where labour costs form a smaller fraction of overall costs - companies are able to compete effectively with locations such as China whose primary advantage comes from low labour costs. Business investment in R&D is also increasing in the manufacturing sector and the latest Community Innovation Survey shows that Scottish companies have some of the highest rates of innovation in the UK. These trends, together with the effective exploitation of new technologies and increasing efficiency, will ensure that manufacturing companies are well-placed to operate successfully in Scotland despite the increased global competition they now face.
Box 1.4: Stern Review On The Economics of Climate Change |
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Sir Nicholas Stern launched the Review on the Economics of Climate Change on 30, October 2006. The Review represents the most comprehensive study to date of the economics of climate change and confirms the seriousness of the threat to the global economy. Some of the key findings from the Review are highlighted below. The costs of 'business as usual' are high. The economic analysis presented in the Review calculates that a general temperature increase of 2-3ºC, and even higher beyond the end of the century, will reduce global per capita consumption by between 5 and 20 per cent. The impacts of climate change are not distributed evenly. For example, the poorest countries will suffer earliest and most from climate change, and are the least able to adapt. Climate change will limit the growth and development prospects of many developing countries, which in turn may impact upon international security and migration concerns in developed countries. There may be initial benefits for higher latitude countries, including Scotland, from fewer cold-related deaths, longer growing season, etc., but as temperatures rise further some of these benefits will be lost. Within developed countries the effects of climate change will fall disproportionately on low-income households as they are often the least able to adapt. They have fewer financial resources, including insurance, to protect themselves against the consequences of climate change. Deep cuts in emissions will have an economic cost. The cost of stabilising emissions levels at 500-550ppm CO2 equivalent by 2050 is estimated to be 1 per cent of global GDP. Greenhouse gases can be cut in four ways and costs will vary depending on the combination of methods adopted: - reducing demand for carbon intensive products;
- increasing efficiency in energy use;
- action on non-energy emissions (deforestation and agricultural emissions);
- switching to low carbon technologies for power, heat and transport.
The benefits of strong early action outweigh the costs. Mitigation must be viewed as an investment now to avoid the risk that future temperature increases bring about abrupt, large scale, irrevocable climate change. The Review estimates that implementing strong mitigation policies this year would lead to net benefits of $2.5 trillion. But the longer we wait to take effective action, the more costly it will be. The transition to a low carbon economy will also bring business opportunities. For example, global markets for low carbon energy products are likely to be worth at least $500 billion by 2050. Stern states that tackling climate change is the pro-growth strategy for the longer term. Policy to reduce emissions must be based on three essential elements: carbon pricing, technology policy and the removal of barriers to behavioural change. Establishing a 'price' of carbon through tax, trading, or emissions standards will ensure that people are faced with the full social cost of carbon when making investment decisions and that emissions reduction can take place wherever it is cheapest to do so. The social cost of carbon is likely to increase over time, making more and more low-carbon technologies cost-effective. Finally, international action will be necessary across a range of activities. Climate change mitigation raises the classic problem of the provision of a global public good. No single country can change the global path on its own and international cooperation will be required to implement policies across a range of key sectors. The Executive recognises that climate change is one of the most serious threats facing the world today, which the Stern Review confirms. Scotland's Climate Change Programme, published in March 2006, sets out how Scotland is tackling the causes of climate change and helping Scotland adapt to the unavoidable impacts. The Scottish Executive has put in place an ambitious carbon savings target and a robust framework to support its achievement. Recently published data show that emissions of greenhouse gases in Scotland fell by 16% between 1990 and 2004 and that emissions of carbon dioxide, the main greenhouse gas, fell by 14%. Climate change thinking is being mainstreamed into key policy areas and progress will be reported annually. The Executive will continue to work with the UK Government to consider future climate change legislation and the implications for Scotland. |
1.3.5 Transport
The transport sector 20 (logistics, haulage and rail, air, and ferry services) directly accounts for 4.8 per cent of GVA in Scotland. As Chart 1.26 demonstrates, GDP growth in the transport sector has been considerably more volatile than in the wider economy. The most recent data show that the sector has grown by 0.7 per cent over the quarter and by 3.3 per cent over the year to 2006 Q2.
However, as with the real estate and business services sector, transport also plays a key role in facilitating economic growth in the wider economy. For example, through business time savings and/or agglomeration effects, firms can lower costs and take advantage of specialised labour and business services, which will have a positive impact on productivity. Transport links have also been shown to be an important determinant in attracting international visitors and investment, and enable Scottish companies to compete effectively in the global market.
Chart 1.26: Transport and the Whole Economy 1998 Q1-2006 Q2
Source: Scottish Executive
Transport companies employed just under 90,000 workers in 2004, around 4 per cent of total Scottish employment. Employment in the sector has grown by approximately 13 per cent since 1998, faster than in the wider economy. Whilst all areas of the sector have seen employment growth, the largest increase has been in supporting and auxiliary transport activities, where employment increased by 32 per cent over this period.
Chart 1.27: Transport Employment Growth (1998-2004)
Source: ABI 2004
Within air transport 21, employment grew by 11 per cent over the period, slightly slower than the sector as a whole. The increase in employment coincides with rapid growth in air travel between 1998 and 2005, which saw the number of air terminal passengers in Scotland increase by over 55 per cent to reach almost 23.8 million.
The growth in passenger numbers partly reflects the growth in low-cost airlines operating from Scotland in recent years. However, the increased level of competition created by low-cost operators, together with technological improvements in the air travel industry, possibly explains why employment growth has not been even greater than that witnessed. As Chart 1.28 illustrates, whilst air transport has seen the strongest growth in passenger numbers, other forms of transport have also seen an increase in the number of passengers carried. In particular, the number of rail passengers carried on the Scot Rail network has increased over this period from 58 million to 75 million.
Chart 1.28: Growth in Passenger Numbers (1998-2005)
Source: Scottish Executive Main Transport Trends
Bus data is for 1998-2004
1.3.6 Construction Sector
Output in the construction sector has continued to grow strongly. In the year to 2006 Q2 output in construction increased by 4.6 per cent, while the economy as a whole grew by 2.2 per cent. The construction sector accounts for 6.6 per cent of the Scottish economy and had, in 2004, a turnover of £12 billion. Growth in the construction sector is highly dependent on the performance of the wider Scottish economy with only £30 million of construction sales coming from exports. Continued growth in the Scottish economy in recent years, rising house prices and historically low interest rates are some of the key drivers behind the strong performance in the sector.
In terms of employment, the labour force survey reports that there were around 208,000 people employed in the construction sector in Spring 2006. Some 80 per cent of all registered construction companies in Scotland report zero employees, reflecting the high proportion of self employment in the industry: one in four workers in construction are self-employed.
Skills shortages are often reported by employers to be the most challenging issue the construction sector faces. In the Scottish Employers Skills Survey, Futureskills Scotland reports the skills shortages foreseen are mostly in technical and practical skills. The expected shortages in these skills are significantly higher in construction than in the economy as a whole: 58 per cent in construction versus 36 per cent in the economy as a whole. These shortages occur despite the more recent entry into the job market of skilled migrants, particularly from Eastern Europe.
The type of skills in shortage in the construction sector is in contrast with other sectors where problems finding workers with adequate soft skills tend to dominate. The cause of the reported skills shortages in the construction sector is hard to isolate. However, it could be related to the move of the economy to a service base, and to the perception of construction as a less attractive career opportunity. These problems are recognized by the industry and steps have been taken to address the issue.
1.3.7 Agriculture Sector
In terms of GVA, the agriculture sector within Scotland is relatively small, accounting for 1.3 per cent of the total economy in 2002. However, this is higher than in the UK, which has an equivalent GVA share of 1 per cent. In addition, there are other indirect linkages that the agriculture sector has in the Scottish economy, such as in the food and drink sector. For example, over one third (36 per cent) of the total inputs to the Scottish food manufacturing sector are sourced from Scottish agriculture. With regard to employment, the total size of the agricultural workforce in 2005 was 68,000 of which 40 per cent are farm occupiers and spouses and the remainder are employees. In recent years, the number of employees in Scottish agriculture has declined and with this total labour productivity in Scottish agriculture has increased.
The performance of the agriculture sector depends in part on the nature of direct support to the sector. Traditionally direct support to EU agriculture under the Common Agricultural Policy ( CAP) was in the form of production subsidies. However, from 2005, farming support has been decoupled from production. This has shifted direct support from production subsidies to farm income support through the transfer of a Single Farm Payment ( SFP). Although the transfer of the SFP is made without any requirement for production, it is subject to the stipulation that the farm business maintains farm land in good agricultural and environmental condition.