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THE IMPACT OF RECESSION
This update to the Economic Recovery Plan presents an early assessment of the impact of recession, with new supporting data on economic performance.
Global economy
Following a sharp contraction in global output in the second half of 2008 and into the first quarter of 2009, many advanced economies remain in recession - although the rate of contraction in GDP eased considerably in the second quarter of 2009. Output in the US, for example, declined by 0.3% in Q2 09 compared to the previous quarter - a marked improvement compared to the 1.6% decline experienced in Q1 2009.
A small number of advanced economies have experienced a sharper improvement and have recorded positive growth. In particular, Japan bounced back from a quarterly contraction of 3.1% in Q1 2009 to record growth of 0.6% in Q2 2009. Similarly, despite the broad Euro Area suffering a further contraction in output of 0.1% in Q2 2009 compared to Q1 2009, both France and Germany grew by 0.3% compared to the previous quarter.
Although the origins of global recession are in the financial sector, the impact has been felt most severely in the industrial sector. The collapse in global demand has led to a sharp drop in industrial production. There is now some evidence that this impact bottomed out in the first quarter of 2009. The latest data illustrate that industrial production has stabilised and begun to show tentative signs of recovery in some advanced economies.
Unemployment rates are continuing to rise, in particular, the US unemployment rate has almost doubled from 4.9% at the start of 2008 to 9.8% in September 2009. The increase in unemployment has not been as sharp in the Euro Area, but this is primarily due to a much higher base unemployment rate. In recent years the Euro Area unemployment rate has been around 7% to 9%, compared to a rate of around 4% to 6% in the US. In the UK, unemployment has increased from 5.8% to 7.9% over the year to the three-month period to June-August 2009.
Conditions in international financial markets have continued to improve since the start of 2009. Confidence has started to return, in line with expectations of economic recovery. The International Monetary Fund 2 has stated that there has been a reduction in the risk of a systemic collapse in financial markets, following a period of unprecedented international policy interventions in the financial sector. In recent months stock markets have also recovered close to levels witnessed prior to the peak of the financial crisis in Autumn 2008, although there has been some downward re-adjustment and some uncertainty remains.
The impact of the recession on the Scottish economy3
The Scottish economy has been in recession since the middle of 2008, although there was no easing in the rate of decline in GDP in Q2 2009, falling by 0.8% compared to the previous quarter. Growth has now been on a downward trend since Q4 2007 - turning negative in Q3 2008.
Although the UK entered recession a quarter earlier, following a 0.1% contraction in Q2 2008, the overall decline in output in Scotland has been broadly in line with the UK. Preliminary estimates for Q3 2009 show a continued easing in the rate of decline in the UK economy with GDP contracting by 0.4% on the previous quarter.
The slowdown in economic growth started to impact on the Scottish labour market in the middle of 2008, with employment levels starting to decline and rises in unemployment. The pace of this deterioration accelerated in the first half of 2009. The Scottish unemployment rate rose sharply from 4.7% to 7.1% over the year to the three-month period June-August 2009 (a rise of 67,000). Over the same period, the working-age employment rate declined from 76.0% to 74.0% - a reduction of 63,000 in
working-age employment.
Every Scottish region has experienced a rise in the number of people claiming unemployment benefit, with the rate of increase particularly sharp in areas such as Lanarkshire, Edinburgh and the Lothians. However, areas where pre-recession unemployment levels were above the national average, such as Glasgow, North Ayrshire and West Dunbartonshire have also witnessed significant increases. Furthermore, all age groups in Scotland have experienced a rise in unemployment, particularly the 16-24 age group.
Impact across industry sector
The contraction in output in the Scottish economy has been broad-based, with nearly all sectors experiencing a decline. The manufacturing and construction sectors have suffered the largest drop, with output falling 11.7% and 13.2% respectively since the Scottish economy entered recession - broadly matching declines elsewhere in the UK. The service sector has experienced a less marked decline - 3.9% since the start of the recession - with output in the financial services sector falling sharply since the onset of the international financial crisis in Autumn 2007.
The changes in employee jobs by sector broadly follow the pattern of the decline in output. The most rapid rates of decline have been in the manufacturing and construction sectors, falling by 6.0% and 4.1% over the year to June 2009 respectively, in line with reductions at the UK level. The largest falls in employee jobs were in Distribution, Transport, Finance and Business Services (down 40,000 over the year), and Manufacturing (down 13,000).
Constrained credit conditions
The defining characteristic of the current downturn has been the significant constraints on the availability of credit and other forms of finance across advanced economies. The recent Scottish Government Access to Finance Survey 4 examined credit conditions within the Scottish economy and revealed the extent of the impact of the financial crisis on Scottish companies.
Overall, the level of demand for finance by Scottish firms has risen since 2007, reflecting the increased financial support businesses have required during the recession. At the same time however, the supply of finance has declined compared to 2007. This is most apparent for 'micro' firms (less than ten employees). The fall in supply reflects a combination of factors, including the apparent attempt of financial providers to manage risk more effectively in the current economic climate by tightening the credit application process and increasing the requirements for applications for credit.
Future prospects for Scotland
Since the end of the first quarter of 2009, there has been a general improvement in forward-looking indicators, such as business confidence, across most advanced economies. For example, business confidence in the US, Euro area and the UK has recovered to levels above those prior to the intensification of the financial crisis in September 2008.
Despite this improvement, the overall level of confidence still remains low compared to recent years and, in most cases, the indicators are consistent with low or zero growth, or modest declines in output across the advanced economies.
The IMF published updated international forecasts on 1 October 2009, with world output expected to contract by 1.1% in 2009 before expanding by 3.1% in 2010.
Their 2010 forecasts for many advanced economies have improved since their last publication in July 2009 - due to faster than expected recovery in financial conditions. Despite this, many advanced economies are forecast to achieve only modest growth in 2010, with developing and emerging economies expected to drive the global recovery. The latest forecasts predict a modest recovery for the Scottish economy in 2010, following a sharp decline in output in 2009.
Although the emerging evidence and economic growth forecasts for the global economy provide reason for cautious optimism, there are important lessons from previous recessions on the risks of continuing weakness in labour market conditions. If the pattern of previous recessions is repeated, unemployment may continue to rise for a number of months following a return to growth in the output of the economy.
The Scottish Government's primary immediate challenge is therefore to act swiftly on unemployment - avoiding the mistakes of previous recessions, where whole communities became disengaged from the labour market for the long-term and there were enduring rises in economic inactivity. A focus on employment and employability will assure future improvements in our economic performance and reduce the future pressures on public services that unemployment can create.
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