Coronavirus (COVID-19) business support measures: evaluation

3. Impact of COVID-19 on Scotland's Businesses and Economy

This section of the report provides contextual analysis setting out the impact of the COVID-19 pandemic on the Scottish economy and its businesses. Existing macro and microeconomic data is used.

High level timeline of COVID-19 restrictions in Scotland:

• national lockdown in March 2020
• gradual easing of trading restrictions from May 2020
• localised reintroduction of trading restrictions from August 2020
• central belt trading restrictions in September 2020
• increased 'circuit breaker' regional restrictions in October 2020
• easing of some retail restrictions in December 2020
• national lockdown from 26 December 2020
• gradual easing of trading restrictions from March 2021
• mainland local authorities in levels 1 or 2 in June 2021
• whole country expected to enter level 0 in July 2021
• remaining legal restrictions to be lifted in August 2021

Scotland's Economy

While the COVID-19 pandemic is first and foremost a health crisis, it has also had an unprecedented impact on businesses and the economy since March 2020. The public health measures introduced to contain the spread of the virus necessitated the temporary closure of many businesses during multiple lockdown periods and required others to restrict or change how they operate. Chart 1 below shows how severely the COVID-19 pandemic has affected Scotland's onshore GDP over the past year. Two significant dips can be seen as output fell by 17.8% in April 2020 compared to March 2020 due to the first national lockdown and fell again in January 2021, however to a lesser extent.

Source: SG Monthly GDP Estimate: May 2021 (experimental official statistics)

The economy appears to have become more resilient in subsequent lockdowns as businesses and consumers adapted to the ongoing restrictions. Business and labour market support will have also played a part in easing the impact of the pandemic on Scotland's economic performance. Output is estimated to have increased by 0.9% in May 2021, with growth in many sectors of the economy despite the ongoing restrictions for some customer-facing services. This is the fourth consecutive monthly increase in GDP, after output reached its recent lowest point in January when the second lockdown period was extended across mainland Scotland. Despite this recent increase, output remains 2.7% below the level in February 2020 (3.1% down for the UK), prior to the direct impacts of the COVID-19 pandemic, however it is now 1.9% higher than at the recent high point in October before regional restrictions began to be applied in the autumn.

Recovery from the national lockdown in 2020 has been unequal across sectors with some recovering close to pre-pandemic levels whilst others continue to lag behind (chart 2). Scotland's GDP fell by 22.6% over February-April 2020 during the national lockdown. This varied significantly by sector, for example, Accommodation & Food Services output fell by 82.6% while Financial & Insurance Activities output fell by 6.8%. The pace of recovery has also varied by sector, reflecting the impact of restrictions during the year. The Accommodation & Food Services and Arts, Culture & Recreation sectors remain below levels in February 2020 (27.6% and 33.4% respectively), while Manufacturing (which fell by 22.8% over February-April 2020) recovered to its pre-pandemic level in May 2021. The Accommodation & Food sector accounts for 3.2% of Scotland's output. Collectively, the four sectors remaining furthest below February 2020 output levels accounted for 7% of output in May 2021.

Source: SG Monthly GDP Estimate: May 2021 (experimental official statistics)

The Monthly Business Turnover Index gives an early indicator of business activity in Scotland and shows the impact on businesses' turnover following March 2020 (chart 3). Nearly all sectors saw a significant decline in turnover in 2020 apart from Food Retail. Compared to 12 months ago, the all-industry business turnover index is 49.7. This indicates that, on balance, turnover is at a similar level in real terms to March 2020. It should be noted that this will still be lower than pre-pandemic levels in February 2020, due to the sharp drop that occurred in March 2020 when the first lockdown began.

Source: SG Monthly Business Turnover Index, March 2021

The index remains strongly negative for the Accommodation & Food Services sector and the Culture, Recreation and Other Services sectors, with many face to face or indoor services subject to ongoing restrictions in recent months. The Food Retail sector shows a sharp dip in March 2021, which is likely to reflect that sales are lower this year than they were when people were panic buying items in March 2020.

Labour Market

The labour market has also been impacted as a result of the unprecedented restrictions placed on business in response to the COVID-19 pandemic. The estimated employment rate (the proportion of people aged 16-64 in work) in Scotland between February-April 2021 was 74.2%, down 1.2 percentage points since December 2019-February 2020 (pre-pandemic). Scotland's employment rate saw a sharper fall in 2020 compared to the UK and remains below the current UK rate of 75.2%. It should be noted that ongoing use of the CJRS makes the extent of recovery in Scotland's labour market difficult to measure.

Source: Labour Force Survey,^[5] ONS

The estimated unemployment rate (16+) in Scotland between February-April 2021 was 4.2%, down 0.5 percentage points since December 2019-February 2020 (pre-pandemic) but up 0.1 percentage points over the quarter. While Scotland's employment rate is below the UK as a whole, the unemployment rate was lower than the UK rate of 4.7%. This is partly explained by Scotland's higher economic inactivity rate compared to the UK (22.6% and 21.0% respectively).

By gender, the unemployment rate over the year (Jan-Dec 2020) for women was 3.9% (4.5% in the UK) compared to 4.5% for men (4.9% in the UK). The unemployment rate for both women and men was lower than a year ago (down 0.7% and 0.2% respectively). In Jan-Dec 2020, the young person's unemployment rate was 13.5%, higher than a year ago (8.3%) and higher than the UK rate of 13.3%.^[6]

Source: Labour Force Survey, ONS

The COVID-19 pandemic and the subsequent cycle of lockdowns and restrictions imposed to curb infection rates have also had a significant and negative impact on the self-employed in Scotland, but to a lesser extent than in the UK as a whole (table 2). In Q4 2020, self-employment fell by 12% across the UK compared to Q1 2020, while Scotland saw a decline of only 2%. Scotland, however, did record the second lowest self-employment rate of 12.14% in Q4 2020 out of the UK regions (13.79% for UK as a whole).

Table 2: Self-employment by region in absolute numbers (in thousands, rounded) and percentage change, 16+

	Oct-Dec 2020	Oct-Dec 2019	% Change Q4 2020 vs Q1 2020	% Change Q4 2020 vs Q3 2020	% Change Q4 2020 vs Q4 2019
North East	137	145	-7.49	0.98	-5.62
North West	410	450	-11.42	-5.89	-8.80
Yorkshire and Humberside	343	358	-2.78	2.19	-4.02
East Midlands	277	338	-15.29	-7.93	-17.89
West Midlands	327	380	-13.03	-5.61	-14.02
East of England	422	489	-13.67	-4.79	-13.63
London	760	902	-16.22	-4.39	-15.74
South East	641	791	-14.82	2.13	-18.96
South West	413	475	-11.12	-4.36	-12.96
Wales	172	193	-5.81	-4.51	-10.97
Scotland	303	315	-2.17	0.77	-3.81
Northern Ireland	111	134	-18.00	-6.69	-16.77
United Kingdom (Total)	4316	4970	-12.05	-3.05	-13.11

Source: Quarterly Labour Force Surveys, weighted data. UKRI analysis.

Note: Excluding full-time students. Unpaid family members are not counted as self-employed.

For the UK, the worst hit industrial sectors in Q4 2020 for self-employment were Accommodation & Food Services, Manufacturing and Construction. Only Financial & Insurance Activities saw an increase in the number of self-employed workers compared to the previous year. Disparities by gender are small, but under 45s saw substantially higher decreases in self-employment than the over 45s. There are also concerning high decreases of ethnic minority self-employment, with a 24.1% and 27.4% decrease in self-employment in Asian and Black ethnic groups respectively, compared with only an 11% decrease in White self-employment.

Pay As You Earn Real Time Information shows that there were 2.4 million payrolled employees in Scotland in May 2021. Compared with the same month the year before, the number of payrolled employees had risen by 0.4% (9,000). This compares with a rise of 0.5% for the UK over the same period. The estimated number of payrolled employees in Scotland in May 2021 fell by 2.1% (50,000) compared with February 2020, the last month prior to the pandemic. This compares with a fall of 1.9% for the UK over the same period.

Source: HMRC PAYE (experimental statistics)

Results from the Small Business Survey 2020, covering the period September 2020 to April 2021, outline measures taken by SME employers based in Scotland to cope with impact of the pandemic (Chart 7). The most common measures taken were: 68% of SME employers furloughed staff, 48% reduced staff working hours, 32% provided facilities for remote working, and 17% asked staff to take on additional tasks. 1 in 10 SME employers had laid off staff permanently while 5% laid off staff in the short-term without furlough.

Source: UK Government Small Business Survey 2020

Businesses

Due to the various COVID-19 restrictions since March 2020, many businesses in Scotland were required to close or at least change the way they operate which had a significant impact on their business performance. Even businesses that were able to trade in some form saw a fall in demand for their products, negatively impacting their turnover and cash flow. Recent evidence shows that the fortunes of some businesses have improved in recent months as restrictions ease in Scotland. Nevertheless, the pandemic is still having a significant impact on many sectors, with turnover for many businesses still below the level they would expect in 'normal' times.

Chart 8 shows the share of businesses in Scotland (with 10+ employees) trading over the course of the pandemic as many consumer facing industries were forced to close. 79% of businesses were trading in the first reported wave when Scotland was exiting its first lockdown while 81% were trading at the lowest point in the national lockdown at the end of 2020 / start of 2021. In the most recent wave of the BICS survey, covering the period 28^th June to 11^th July 2021, nearly all (98%) businesses were trading as restrictions eased.

Source: Business Insights and Conditions Survey (BICS)

A significant share of businesses in Scotland have seen their turnover decline in the past year due to COVID-19 restrictions. At its peak in the period 29^th June to 12^th July 2020, 65% of businesses (with 10+ employees) reported decreased turnover compared to what is normally expected for that time of year (chart 9). indicating that they became more resilient.

Source: Business Insights and Conditions Survey (BICS)

Finances have improved for many businesses with a third (33%) reporting decreased turnover in the most recent wave of the survey (28^th June to 11^th July 2021). When businesses were asked the main reason for the change in turnover, 73% reported the COVID-19 pandemic as the cause. On average, businesses were less likely to report decreased turnover in subsequent lockdowns following the first in March 2020.

There were two industry sectors where more than half of trading businesses experienced a decrease in turnover compared with what is normally expected – Accommodation & Food Services (68%) and Arts, Entertainment & Recreation (61%) (Chart 10). 90% of firms in the Arts, Entertainment & Recreation and 89% of Accommodation & Food Services sectors blamed the COVID-19 pandemic for the change in turnover, higher than average for all businesses in Scotland (73%).

Source: Business Insights and Conditions Survey (BICS) Wave 34

Chart 11 sets out how long businesses in Scotland expect their cash reserves to last, broken by sector. Nearly a quarter (23%) of businesses reported having no or less than three months of cash flow in the most recently available data from BICS^[7] (Wave 33 – 14^th to 27^th June 2021). Businesses in the Construction (36%), Admin & Support Services (31%) and Accommodation & Food Services (27%) sectors were more likely to report that they had no or less than three months' cash flow.

Source: Business Insights and Conditions Survey (BICS) Wave 33

During the national lockdown at the beginning of 2021, a peak of 18% of businesses (with 10+ employees) in Scotland reported that they were insolvent or at least moderately at risk of insolvency (chart 12). This has steadily declined to 10% of businesses in the most recent wave of the survey (28^th June to 11^th July 2021).

Source: Business Insights and Conditions Survey (BICS)

Businesses in the Accommodation & Food Services, Admin & Support Services, and Arts, Entertainment & Recreation sectors were more likely than average to report they were at risk of insolvency over the past year (chart 13).

Source: Business Insights and Conditions Survey (BICS) Wave 34

Overall, numbers of registered company insolvencies have remained lower than pre-pandemic levels since the start of the first UK lockdown in March 2020 (Chart 14). There were 51 total corporate insolvencies in Scotland in May 2021, 46% higher than in May 2020 but 35% lower than in May 2019.^[8] This indicates that support provided by the Scottish and UK Governments is saving businesses unable to trade normally due to the pandemic from insolvency, although there is a risk that it may also be propping up some firms that would have been competed out of the market in 'normal' times.

Historically, the volume of company insolvencies registered in Scotland has been driven by compulsory liquidations. However, as seen in Chart 14, since March 2020, the numbers of registered creditors' voluntary liquidations have been higher than registered compulsory liquidations in 12 out of 14 subsequent months.

Source: UK Insolvency Service; Monthly Corporate Insolvency Statistics: May 2021

Business deaths peaked in Q1 2020 for both Scotland and the UK as a whole following the onset of COVID-19 pandemic (Chart 15). Business births, on the other hand, did not begin to decline until Q2 2020 and have since rebounded to levels seen before the pandemic. Scotland has yet to overtake business deaths with births as the UK has achieved for Q1 2021 which may be the result of Scotland's more cautious approach to restriction easing.

Despite the recent strong growth in business creations, the number of closures in Q1 2021 in the UK was 27% higher than the closures in the average of first quarter closures in 2017 to 2019.^[9] On this basis, the most significant closures included the Finance & Insurance, Real Estate, and Information & Communication industries. Interestingly, these are industries that have not been targeted for COVID-19 support as they were determined as to have not been directly impacted by restrictions. New UK businesses Q1 2021 were smaller, based on average employment, than those added in Q1 of 2017 to 2020. This is in part due to the rise of online businesses that require fewer employees.

Source: ONS Business Demography, quarterly experimental statistics, Q1 2021