New Scottish Gdp Figures, And The Bank Holds Firm On Rates

4th February 2024

It might have flown under the radar compared with news on interest rates from both sides of the pond, but the first monthly estimate for Scottish GDP in November 2023 was released this week by the Scottish Government, alongside the Quarterly National Accounts publication for quarter 3 of 2023.

There are two main areas of news. One is that the Scottish Government has implemented the same changes that the ONS made at UK level towards the end of last year, and the effect has been similar. Scottish GDP in November 2023 was thus estimated to be 1.1% larger than it had been pre-pandemic, with particularly large changes in the measurement of real output in the public sector.

The other area of interest was the latest estimate for GDP, where the news was less positive. Growth in October was -0.6%, 0.1% lower than originally estimated, and GDP fell again in November. In the absence of any major revisions, quarter 4 of 2023 is almost certain to have seen a contraction in the economy - growth in December would need to have been an implausibly large 1.6% month-on-month for the quarter to be flat on the previous one.

Two main industries have led the slowdown in the final quarter of last year in Scotland. Manufacturing output fell by 1.7% in each of October and November, as it accounts for around 10% of the overall economy, that brought down growth by 0.2% in each month. Electricity and gas supply, on the other hand, while smaller, outpaced manufacturing's negative contribution, at -0.3%. Output in the sector has now fallen by 18% in just two months. Growth was weak or negative in near enough all sectors in October, but financial services, administrative services and arts and recreation rebounded strongly in November.

With 11 months' worth of data, we can also be pretty certain on what the growth rate for 2023 as a whole will have been, and it looks like 0.3% - again, December would have needed to be an implausible outlier to shift this. This echoes our view in the past few months: we might have avoided a recession, but growth has been pretty weak.

We will be publishing the latest edition of our Economic Commentary next week, so stay tuned for our latest update. Or better yet, register here and come join us at our launch event on the 7th in Edinburgh.

When they were up, they were up: no rate cuts yet from the Bank
Excuse the allusion to the "Grand Old Duke of York", but there's no sign of the Bank of England marching us back down the interest rate hill yet. As we said before, services inflation - which is much closer to domestically generated inflation than the headline rate as a whole - remains stubbornly high, and this was one of the factors mentioned by the Governor for the decision to hold Bank Rate at 5.25%.

The press conference was heavy on expectation management, with the Governor pointing out that inflation is likely to hit the 2% target soon, but rise again soon after due to base effects - in lay(-ish) terms, the very high energy prices from the beginning of last year will start dropping off the 12-month calculation. The Bank will want to see through that and instead focus on the underlying inflation, which they still view as too high.

Nonetheless, it was pretty much confirmed that – absent any further shocks, a pretty important caveat that has not necessarily held true recently! – the Bank's next move will be to cut Bank Rate, the question being when. Despite its operational independence, the Bank will come under heavy pressure to do so sooner rather than later.

And yet in a three-way split vote, the Monetary Policy Committee actually had more members voting for an increase in interest rate than for a decrease. So the consensus on Threadneedle Street still seems to point towards caution.

Note
This article is from the Fraser of Allender Institute - Author João Sousa. You can sign up for updates.
https://fraserofallander.org/weekly-update-new-scottish-gdp-figures-and-the-bank-holds-firm-on-rates/