IT IS a formal pledge of the new SNP administration to improve the quality and timeliness of Scotland's economic statistics. Looking at the preliminary numbers for Scotland's Gross Domestic Product released last week, it is fair to say it has its work cut out.
On the surface the numbers look reasonably good. Scotland's GDP in the second quarter of this year rose by 0.9% on the previous quarter, a higher rate of growth than that recorded for the UK as a whole (0.8%). This, however, still left the year-on-ye
ar growth in Scotland's GDP at 2.3%, trailing the UK (3.1%).
Encouraging? Look again. Sweeping and unexplained swings in sector performance, a strange 10.9% surge in the output of utilities and a mystery fall of 2.8% in the performance of the financial services sector - all in one three-month period and before the onset of the global credit crunch in the third quarter. How can the overall figure be credible when its components appear to behave in the most erratic and unfathomable manner?
Scotland's GDP numbers are riddled with such anomalies and unexplained changes. But if it is of any comfort to the administration's chief economist Andrew Goudie, the problem is by no means confined to Scotland. There have also been some strange movements in the GDP numbers for the UK overall.
For example, there are some anomalies in the UK figures for the third quarter (Scotland's GDP numbers tend to come some four months after the end of the quarter being reported, those for the UK come in just six weeks later, so the Scottish numbers are constantly 'lapped' by the UK's). The UK figures for the July-September period reveal something extraordinary. Instead of any evidence of a slowdown due to the effects of the severe turbulence in financial markets during this period, the numbers show that the third quarter was a great time for UK finance and business services, the fastest-growing sector of the UK economy in recent years.
Perhaps we should have credit crunches more often. For the numbers show that despite a near total seizure of corporate merger and acquisition business and the run on Northern Rock, the output of 'business services and finance' grew by 1.7% from the previous quarter. Without this contribution, UK GDP would have grown by only 0.5% on the quarter and by 2.7% on the year, as against the published 0.8% quarterly and 3.3% annual rates of increase.
Of course, there is much in 'business services and finance' that occurs well away from financial markets. For example, residential rents account for about one quarter of this sector's output. But the contribution from banking is strangely computed. Rather than being arrived at (as elsewhere) through a calculation of fees received less employee compensation, much of the contribution from banking comes from the spread between interest paid and interest received. So when interest rate spreads widen - as they did dramatically in August and September - the banks' output is deemed to have increased.
In the words of Stephen Lewis, economist at Insinger de Beaufort: "The concepts that underlie the estimation of financial sector output are so slippery that policymakers would seem well-advised to make a mental reservation regarding the implications of growth in this area for the output gap in the economy as a whole."
The strange way in which GDP is calculated in this vital sector may help shed light on an anomaly: the overall buoyancy (apparently) of the economy and the disappointing figures for tax revenues, which have been coming in significantly lower than expected.
Scotland's GDP numbers have been the subject of criticism for some time. But the latest second-quarter figures drew a scorching scrutiny from the Centre of Public Policy for the Regions attached to Glasgow University.
Research by economists John McLaren, Richard Harris and Brian Ashcroft hit on a number of unexplained anomalies. For example, for the second time in a year the figures for retail sales in Scotland have been dramatically revised. In October last year the figures for the retail sector were revised up in earlier years and down in more recent years so that the numbers for 2005 showed a decline of 2% on 1998. By comparison, the UK figure rose by 33%. Was Scotland's retail sector that depressed while across the UK it barnstormed on?
Last week's publication showed further huge revisions to the data, this time of a fall of 18 points in 1999. So, under the new calculations, growth in the retail sector is calculated to have risen by 26% between 1998 and 2006.
The latest GDP figures from the Scottish Government also suggest problematic performance in hotels and retailing. For example, in the second quarter of this year the sector is shown to have suffered another fall of almost 1% on the previous quarter while across the UK as a whole the sector grew by almost 1%. And between 1998 and 2006 the sector grew by only 1% in Scotland against a growth of more than 31% across the UK. This is an astonishing gap that would surely merit some detailed explanation.
As worrying are the numbers for financial services in Scotland. These showed a fall of almost 3% in the second quarter against a rise of more than 2% for the UK as a whole. When I phoned the administration last week to seek an explanation, none was forthcoming, save for an observation that "these numbers do fluctuate". Well, they do, don't they? According to the longer run figures, financial services in the UK have outgrown Scotland by at least one percentage point in each year since 2003, culminating in the most recent figures which show the latest annual growth across the UK of 9.6%, against 5.3% for Scotland.
I am sure this will make for a most interesting discussion at the next meeting of the Financial Services Industry Advisory Board chaired by the Finance Secretary John Swinney. And these statistics overall should be an urgent area for examination by the First Minister's new Council of Economic Advisers. For if it is to embark on any meaningful analysis of the Scottish economy there needs to be the fullest confidence in the credibility of GDP data.
This can never be, of course, an exact science. But better explanations are needed from the administration. There is mince, and there are GDP statistics. How can we tell the difference between the two?
The full article contains 1094 words and appears in Scotland On Sunday newspaper.
