Monthly economic brief: May 2021

Overview

This edition of the Monthly Economic Brief provides an update on the latest economic data for Scotland, up to the end of May, covering a challenging start to 2021 in which the Scottish and UK economy as a whole has been in lockdown restrictions since the end of December. However, the significant progress that has been made on the public health front resulting in the recent easing of restrictions in April and May, alongside the ongoing delivery of the vaccination programme, means optimism regarding the economic outlook has improved in recent months.

Our latest GDP data show that Scottish GDP fell 2.1% over the first quarter of 2021. The fall was expected given the restrictions in place over the period, however is notably less than many independent and official forecasts had expected. This is partly due to schools resuming in-person learning during the quarter, but also due to growth in other sectors of the economy as businesses and consumers have adapted to operating and living under restrictions. This is reflected in the monthly data with the contraction confined to January and output strengthening over February and March as the economy restarted its progress back to pre-pandemic levels. Overall, Scotland’s GDP in March remained 5.4% below its pre-pandemic level (having been 22.6% below in April last year), however, significant regional and sector risks remain.

The recent increase in coronavirus cases across Scotland, and the ongoing concern around the spread of new variants, highlight the risks that remain around the easing of restrictions. The easing of restrictions has followed the Strategic Framework levels approach and tighter regional restrictions have been necessary in a few areas which affect the pace at which business and consumer activity in these areas can pick up. Furthermore at a sector level, the scale of the recovery challenge facing consumer facing services sectors remains substantial compared to sectors which have not been so directly impacted by restrictions over the past year and while both domestic and international tourism remains uncertain, the recovery for those sectors will continue to be more fragile.

Building on the growth over February and March, business and consumer surveys have signalled further strengthening of activity for April and May, supported by higher proportions of businesses returning to trading and indications that consumers are returning to retail and recreation spaces. This has also been reflected in the labour market in which the reopening of businesses have been accompanied by a decrease in the number of employments on the furlough scheme coupled with signs of increased recruitment activity. However, 327,100 employments remained on the furlough scheme at the end of March, although survey data suggest that this is continuing to decline. The extension of the scheme until the end of September will continue to protect productive capacity in the economy as businesses navigate the resumption of trading activity, with the return of staff from furlough in an uncertain environment continuing to depend on the evolution of the pandemic.

In that regard, as restrictions continue to ease, it will take time for supply and demand imbalances to resolve as firms establish the capacity they will operate at; both in the labour market and in respect to wider supply chains in which bottlenecks have developed due to a combination of Covid and EU Exit factors. The pace at which household demand and consumption rebounds across the year and the extent to which aggregate savings are unwound will play a key part in this rebalancing.

Overall, optimism regarding the outlook has improved in recent months, both domestically and internationally and the coming months have the potential to see improved optimism translate into stronger activity. However, significant downside risks from the pandemic remain in place while the longer term implications of economic scarring from the pandemic are yet to fully emerge.