Monthly economic brief: December 2020

Overview

This edition of the Monthly Economic Brief provides an update on the Scottish economy into the final quarter of 2020, reflecting on a period in which there has been some recovery from the pandemic’s initial economic shock, but in which further regional restrictions on economic activity continue to shape the pace of recovery and the outlook for the start of the new year.

The Scottish economy grew for the sixth consecutive month in October, having shrank by almost a quarter in March and April during the national lockdown.  Over this period, output has recovered back to 5.7% below its pre-lockdown level in February, demonstrating that progress has been made. However, the pace of recovery has slowed significantly from the summer months as underlying demand in the economy remains subdued and regional restrictions to counter a second wave of the pandemic have been introduced.

This slowdown in growth has been evident across sectors, but particularly most recently in the services sector as restrictions on consumer facing elements such as the hospitality industry have presented particular challenges, while the high street retail sector has faced ongoing subdued demand in what would otherwise be their busiest trading period of the year.

Reflecting these challenges across the UK as a whole, the Office for Budget Responsibility forecast UK GDP to contract by 2.7% in the fourth quarter of 2020, highlighting that the economic recovery back to pre-pandemic levels has some way to go.  However, such forecasts also predate the most recent restrictions and tightening across the UK.

The economic outlook for the start of the new year is set to be particularly challenging and uncertain.  To counter the new strain of coronavirus, mainland Scotland will enter into level four restrictions for a three week period on the 26^th December resulting in the closure of tourism, hospitality and non-essential retail.  The combination of this alongside the restrictions in place across the UK and internationally will have significant economic impacts.  Also, at the time of writing, there is still no confirmation what the UKs trading relationship with the EU will be when the transition period ends on 31 December, presenting further uncertainty for businesses and supply chains.

Looking further ahead, the availability of a successful vaccine and the beginning of the vaccination programme creates more optimism for the medium term economic outlook.  Updated scenario analysis presented in this report sets out that Scotland’s GDP could recover to pre-pandemic levels in 2023 if restrictions are gradually relaxed over the first half of 2021 and a vaccine or other measures limit the spread of the virus.  However, as recent developments highlight, there remains significant risk, both upside and downside, around this scenario and the speed of any economic recovery.

Supporting businesses and jobs through the coming year will remain critical to keeping businesses viable and supporting incomes while restrictions continue to constrain activity and capacity through this challenging period.  Unemployment in Scotland currently remains at low levels (118,000), however the furlough scheme supported over 195,000 jobs at the end of October, with indications that this has increased further in November and December.  This remains a crucial and key lever of support for business and workers, and the extension by one month will help through this difficult period.

Finally, 2020 has been unprecedented in both the scale of economic impacts and also the policy response in supporting the economy. As we move into 2021, we will need to continue to respond to changing circumstances and remain resilient as we move toward a fuller recovery.