Re-industrialisation & the

Scottish Economy

Dr Graeme Roy

Senior Economic Adviser

15 October 2014

Recent Economic PerformanceChart: GDP levels in Scotland, and Pre-2007 Trend

80

85

90

95

100

105

110

115

120

125

2000 2002 2004 2006 2008 2010 2012 2014

Year

Pre-2007 trend GDP

Actual GDP Potential on pre-2007 trend

Labour Market TrendsChart: Difference from 2000-2007 mean across Labour Market Indicators

95

96

97

98

99

100

101

102

103

2008 2009 2010 2011 2012 2013 2014

Unemployment rate Employment rate Average hours worked Full time %

Long-term Ambitions

• Narrowing regional variations in performance

• Tackling barriers to fulfilling economic opportunity

• Creating more sustainable and well-paid employment opportunities

Regional Variations in Scotland

Source: ONS

Chart: GVA per head, UK =100, 2011

Trade BalanceChart: Trade Balance as Percentage of GDP, 1995-2013

-10%

-5%

0%

5%

10%

15%

20%

Austria Denmark Finland Germany

Norway Sweden United Kingdom United States

Source: OECD

Manufacturing and Key Indicators

Manufacturing

output as % of

GVA

Investment

as % of

GDP

Trade

Balance

(% of

GDP)

Business

Expenditure on

Research and

Development

(BERD) as % of

GDP

% Change in

manufacturing

GVA 1990-2012

(2005 prices)

Austria 18.2 22.7 3.2 2.0 75.4

Denmark 10.7 17.4 5.1 2.0 14.6

Finland 15.4 19.8 -1.0 2.4 87.3

Germany 23.8 17.3 5.9 2.0 31.7

Sweden 15.7 18.9 5.8 2.3 140.9

United

Kingdom10.0 14.7 -2.1 1.1 -0.7

Table: International Comparisons across a range of indicators (2012)

Manufacturing

• Traditional definition: combining inputs to produce physical products

• But increasingly more complex - e.g. complementary services

• Scotland’s strengths well-documented. For example:– Life Sciences, Food & Drink; Energy etc– University research– Engineering

Structure of Scottish Economy

3%

8%

29%

9%

11%

7%

15%

18%

1%

7%

12%

8%

13%

8%

25%26%

Agriculture,Forestry and

Fishing

Other production Manufacturing Construction Distribution, Hotelsand Catering

Transport, Storageand

Communication

Business Servicesand Finance

Government andOther Services

% of Total Onshore Output

1973 2009

Source: Scottish Government Input-Output Tables, onshore output

Source of Inputs by Sector

- 5,000 10,000 15,000 20,000 25,000

Agriculture, forestry and fishing

Mining and quarrying

Manufacturing

Energy supply

Water and waste

Construction

Distribution, hotels and catering

Transport, storage and communication

Financial, insurance and real estate

Professional and support activities

Government, health and education

Other services

£ million (basic prices)

Source of Inputs by Sector (Intermediate Consumption), 2011

Total Domestic Consumption Imports from RUK Imports from ROW

Source: Scottish Input-Output Tables

International Comparisons

5

10

15

20

25

30

35

% o

f G

DP

Year

Austria Denmark Finland Germany Sweden United Kingdom

Source: UNCTAD

Chart: Contribution of Manufacturing to GDP, 1970 to 2012

Manufacturing employment…..Chart: Employees in Scottish Manufacturing Sector (‘000s)

……but rising productivity

Chart: Real (volume) GVA and Labour Productivity (2008 Q2 = 100)

Sources: Scottish Government GDP statistics, ONS workforce jobs

The role of Re-industrialisation

• Growing consensus of benefits of focussing on –

– A more sustainable form of growth;

– One that focusses on greater resilience;

– Is less consumption led;

– Has a greater role for exports and investment;

– And is more geographically dispersed.

• A stronger manufacturing sector can potentially play a key role

Stronger Manufacturing Sector

• Innovation – manufacturing firms account for 65% of business R&D in Scotland;

• Trade – nearly 60% of Scottish exports are in manufacturing;

• Geography – spatial balances;

• Investment – physical and human capital & supply chain;

• Employment – earnings tend to be above national average;

• Resilience – value added & less reliance on consumption led growth

• Supports service sector

Policy1. Fundamentals:

– Leadership

– Economic model (e.g. value of long-term investment vs. short-term profit);

– Strengthening Collaborative Approaches

– Ownership

2. Policy priorities

– Access to finance

– Regulation

– Skills & Workforce Development

– Innovation, Internationalisation & Infrastructure

Policy

3. Specific policies (such as use of tax & gov. spending)

– Capital allowances to encourage investment;

– Incentives to encourage R&D activity – either through payroll taxes or corporation tax;

– Supporting remanufacturing and move towards the circular economy;

– Scottish Manufacturing Advisory Service, and focus on strengthening supply chains.

Conclusions

• Move towards services witnessed across most developed economies – not unique to Scotland/UK

• However, there remains a vibrant and diverse manufacturing sector in Scotland – which has evolved over the years.

• Key is how we harness that in the future – and capture emerging opportunities.

• Prize is potentially more robust growth, greater resilience, high quality employment opportunities and stronger presence in international markets