Slowing Scotland and the productivity puzzle

The penny-wise Scot may be a stereotype, but the reality behind it may be costing us some economic growth.

It's one of the explanations offered for the failure of lower energy prices to feed through to strengthened demand elsewhere.

That is: if you're spending £10 less on filling your car's tank, you could spend that money elsewhere, or you could use it to pay down debt or to save.

Scots have a higher average propensity to save than their nearest neighbours.

That's good, in that household debt is still alarmingly high, despite the froth long having gone from consumer lending.

But it's bad, in that it weighs on business confidence that there will be demand out there to justify investment. Private sector investment remains very low.

Slowing up

So says Professor Brian Ashcroft, the author of the Fraser of Allander Institute's regular forecast of growth and employment in the Scottish economy.

He was explaining why the forecast in June, of 2.5% growth this year, has become 1.9%. And 2.5% for next year has come down since June's forecast to 2.3%.

That reflects other data that show things have got uncomfortably sticky for the Scottish economy, and that it is diverging from the UK average around which it has hovered for some years.

Output growth (down to only 0.1% in April to June), employment, unemployment, the purchasing managers index, manufacturing exports, retail sales: they all point to things slowing up.

The simple explanation is that the oil and gas sector is weighing heavily across the country, and not just the north-east. That includes both the services and manufacturing sectors.

As I noted in my previous blog, the energy sector is adjusting to the expectation that the lower oil price is here to stay for a while longer than it thought at the start of this year, so businesses will have to shed staff and dig deeper into costs.

In an industry which had let inflation take hold, a lot of the easy cuts have been made, simply by lopping chunks off contractor charges. Cuts get tougher after that.

Building growth

To the credit of the Scottish government, the happier story to report is that construction is doing well, and all the moreso when compared to construction in other parts of the UK.

It has been helped by Holyrood-funded projects to build a new Forth crossing, a Borders railway, an upgrade to the M8 in Lanarkshire and a new road around Aberdeen.

The bills will come in later, and there are signs that the pipeline of work will have to become smaller.

The Fraser of Allander forecast reflects these factors, plus the weakness of exports as the pound has strengthened against the euro.

Unproductive broadcasters

And while the oil and gas downturn can be treated as part of the business cycle, these Strathclyde University economists say there are longer-term challenges that need to be addressed.

These include the gap in total factor productivity (including labour, capital and land), of 11% behind the rest of the UK, and 22% behind London and south-east England.

It does not seem to be that either Scotland or the UK has a bias to less productive sectors. In areas of the economy that are comparable on either side of the border, some Scots sectors are relatively productive; engineering, science research and, strongest of all, social work.

But far more sectors are relative poor performers. The worst include post, telecoms, head offices and (I'm ashamed to admit) broadcasting.

The Fraser of Allander forecasts are accompanied by an analysis by two economists at Scottish Enterprise, the government's agency for high growth businesses, which looks at some of the reasons behind that productivity puzzle.

Kenny Richmond and Jennifer Turnbull conclude that the reasons include "labour hoarding" through the downturn - bosses hanging on to staff to retain their skills and loyalty, even though the order book was down.

As pay was so constrained for so long, it may have been that managers held back on pricey capital investment, and chose to sweat the labour assets instead.

Either way, that low private sector investment is a significant driver of low productivity and poor productivity growth.

Awkward factor

Their analysis shows the sharp fall in the number of small and medium-scale enterprises involved in exporting. In 2006-07, 20% of SMEs were selling internationally. By 2014, that was down to 12%.

There is a problem with innovation in companies, without which productivity throughout organisations tends to be lower.

The most awkward factor is that perhaps too many companies have been able, and allowed, to hang on too long. Banks have been pressured to show leniency on loan conditions, and interest rates have provided a comfortable cushion for the heavily indebted.

The economics does not sit comfortably with the politics, because the former points to the case for a more vigorous shake-out of the more inefficient businesses. Our business death rate may be too low.

Yes, it would be painful, but it could be necessary to unlock capital which could then be re-allocated to get higher growth companies back to what they do well - growing.