The Scottish economy grew by 2.2% over the year to mid- 2006 – a shade behind the comparable UK figure of 2.3%. Within that total, services provided the bulk of the growth in GDP with an annual increase of 2.9% compared with a fall of 1.1% in the production sector and a 4.6% rise in construction. Manufacturing, which makes up the majority of production, fell by 0.2% over the year, showing that the optimism revealed in several business surveys is not yet showing through in official data.

Over the last six years, where the UK economy has grown at an underlying annual rate of a low of 1.6% to a high of 3.5%, the Scottish economy has grown between a low of 1.2% and a high of 2.3%. Scotland experiences the troughs but not the peaks of UK growth.

It is likely that the gap will re-emerge in 2007 with Scottish growth of 2.3% trailing UK growth of at least 2.5%. Nevertheless, prospects for the Scottish economy in 2007 remain positive. Consumer confidence remains high while retail sales continue to increase at a robust annual rate. The housing market is still recording annual price increases greater than the rest of the UK, although some of this is down to catch-up. In any case, gradual slowing of the housing market is more desirable than a jolting “hard landing”.

Unemployment remains close to a 30-year low, while demand for consumer credit shows the confidence of Scottish consumers remains strong. And yet we could do better. How does Scotland compare with the rest of the UK and our international competitors? Are we holding our place in the global economy?

The chart shows nine indicators comparing Scotland to OECD countries. Comparing recent growth (1994–1999) to immediate past growth (1999–2004), Scotland is below average, coming 28th out of 31 countries and in the third quartile position. On actual GDP per head, Scotland fares better. We are in the second quartile, 15th out of 31 countries. On both growth and GDP and GDP per head, Scotland’s relative position is improving.

On entrepreneurship, showing the rate of new business starts, Scotland comes in the second quartile at 12th out of 24 OECD countries. There have been some recent improvements but Scotland still remains low by international and UK standards.

Our Achilles heel remains business research and development (R&D). Expressed as a percentage of GDP, Scotland comes 19th out of 27 OECD countries in the third quartile and ninth out of 12 UK regions and countries. There may be some gain as R&D spending from financial services is incorporated into the figures but this will not lift Scotland from a low position. High spending on R&D is linked to higher rates of innovation, faster growth of productivity and higher rates of economic growth.

Productivity expressed by GDP per hour shows Scotland in the second quartile of OECD countries at 13th out of 27. Even among UK regions, Scotland comes fifth out of 12 regions/countries. Regrettably, on this productivity measure Scotland is moving down the scale.

Graduates as a percentage of the population age group 25–64 sees Scotland in the second quartile internationally at eighth out of 28 OECD countries in the top quartile. Net migration as a percentage of the population shows Scotland improving and in the first quartile of OECD countries. Scotland has improved its position largely due to the influx of immigrants from Eastern European countries as a result of EU expansion.

In overall employment Scotland is showing improvement compared to OECD countries, where we are in the top quartile at sixth out of 29.

In terms of our export sales per worker, where Scottish sales to the rest of the UK as well as overseas sales are included, Scotland is in the top quartile of OECD countries at number five out of 31 and 4th out of 12 in the UK regions. However, performance against other parts of the UK is falling – particularly comparing exports as a percentage of the economy, reflecting the downsizing of electronics.

In all, Scotland is improving in seven of the nine indicators and only losing ground in two. Although we are improving in many of the indicators, the movement is often from a low position, so there is plenty of opportunity for Scotland to increase its ranking.

These indicators guide Scottish Enterprise’s strategy for growing Scotland’s economy. While we are relatively well connected in global transport links and our people’s skills are relatively good, our major weakness is in “growing business”. Scotland has low numbers of businesses of scale and depressed levels of business R&D, resulting in low business innovation. Better and more effective commercialisation of academic research remains a rewarding goal.

By any international standard, Scotland has a sizeable public sector in relation to the rest of the economy. The full effect of the size of the Scottish public sector on the private sector is often fiercely debated but there is almost total agreement that a negative effect is felt through the public sector competing for talent as evidenced by the claim that almost half of our Scottish graduates enter the public sector.

At the recent David Hume Institute seminar on the subject it was agreed that the size of the public sector does matter but that the type and efficiency of public spend matters more. How much faster would our Scottish growth be if productivity in both private and public sectors was 20% higher? Lifting both is a richly rewarding goal.

Donald MacRae is chief economist at Lloyds TSB Scotland