Bank of Scotland

Scottish economy recovering from slowdown

25 June 2015

The latest Business Monitor from Bank of Scotland shows the Scottish economy recovering from the slowdown experienced at the start of the year. Expectations for the next six months have improved to the fourth best level in seven and a half years.

In the three months ending May 2015, 36% of firms surveyed increased turnover, 35% experienced static turnover, and 29% experienced a decrease. This gave a net balance of +7%, up from the 0% of the previous quarter but well down from the +28% of the same quarter one year ago. This latest result is a welcome reversal of the negative trend identified in the previous six months.

The overall net balance of turnover for firms in the production sector in the three months to end May 2015 was -2%. This is an improvement on the -4% of the previous quarter but well down on the +25% of the same quarter one year ago.

Service firms showed an overall net balance for turnover for the three months ending May of +14%, well up on the +4% of the previous quarter but down on the +29% of the same quarter one year ago. The sectors are showing a sharp divergence.

Volumes of repeat business are virtually unchanged in the latest three months. The overall net balance of 0% is similar to the +1% of the previous quarter but worse than the +12% of the same quarter one year ago. Trends in the volume of new business are similar in the latest three months with an overall net balance of +3% compared to +2% of the previous quarter, but down on the +25% of the same quarter one year ago.

Export activity is showing a significant fall. The overall net balance for export activity at -24% compares poorly to the +6% of the previous quarter and the +14% of the same quarter one year ago. Exporting to Eurozone economies should become easier as growth picks up in many of the currency bloc’s member countries but is being hampered as the rise of sterling against the Euro as Quantitative Easing (QE) takes effect.

Firms' assessment of their immediate prospects in the next six months were on a rising trend throughout 2013 and reached highs in the first two quarters of 2014. The remainder of 2014 showed lower but still strongly positive levels of expectations. Despite the poor experience at the start of this year, expectations have improved and are close to the high levels evident pre-recession. This is the tenth successive Business Monitor showing a positive net balance for turnover expectations.

Expectations for turnover in the next six months ending November 2015 are showing an overall net balance of +22%. This is an improvement on the +14% of the previous quarter but well down on the +36% of the same quarter one year ago. Whilst 46% expect turnover to be static in the next six months, 38% expect turnover to increase against 16% who expect a decrease. Service firms are much more optimistic than production firms, with service firms showing an overall net balance for turnover for the next six months at +27% compared to +14% for production firms.

The latest net balance for expected export activity for the next six months has fallen. The net balance reached -6% - down on the +2% of last quarter and the +23% of the same quarter one year ago. An increase in uncertainty, a slowing world economy and a rising pound sterling have taken their toll of firms’ assessment of export prospects.

Expectations for the volume of repeat business were marginally down on the high levels of the last quarter with an overall net balance of +8% for this quarter compared to +10% for the previous quarter and significantly down +17% for the same quarter one year ago.  Expectations for the volume of new business in the next six months were optimistic with the latest net balance at +16% - up on the +14% of the previous quarter and down on the +32% of the same quarter one year ago.

These expectation levels suggest the private sector of the Scottish economy will show growth close to trend level in the second quarter of 2015, recovering from the slowdown at the start of the year.

Donald MacRae, chief economist, Bank of Scotland said: “The Scottish economy slowed at the start of 2015 but is expected to return to moderate growth in spring and summer. Expectations remain close to pre-recession levels suggesting that growth will pick up in the second quarter of the year."

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