Monthly economic brief: August 2020

Overview

This month's Economic Brief provides updated analysis for Scotland with the latest official statistics continuing to show the scale of the economic shock in Scotland from the Coronavirus pandemic while business survey data is starting to show stabilisation in economic activity as parts of the economy have reopened.

The latest GDP data for Scotland shows the scale of the impact on output from lockdown restrictions with GDP falling 18.9% in April alone. However, this was followed by 1.5% growth in May suggesting that April may be the low point for GDP during the pandemic. Growth in May was driven by a broad based pickup in construction and production sectors, however growth was more marginal in the services sector likely reflecting that large parts of the sector remained closed during the month. In particular, activity in the accommodation and food services sector continued to fall in May, highlighting the continuing challenges faced by this sector.

Despite growth in May, output remains around 22.1% below its level in February, emphasising the scale of recovery that is required. More recent data for the UK and other countries show the scale of the challenge globally. UK GDP fell by 20.4% in the second quarter as a whole, with the level of GDP now 17.2% below its level in February, while Eurozone GDP fell by 12.1% and US GDP fell by 9.5%.

The fall in output not only highlights the domestic economic challenges ahead, but also the global challenges for international trade and investment. The value of Scotland's goods exports remain notably lower than last year, and while this partially reflects the impacts of restrictions on supply chains and demand, the scale of the health and economic challenge across countries highlights the ongoing headwinds that trade is likely to face this year.

The impact of the pandemic on Scotland's labour market is also continuing to emerge. Data for April to June show that employment fell by 15,000 over the quarter while the unemployment rate rose to 4.5%. However, the furlough scheme has continued to be a key support to the labour market over that period, supporting around 30% of employees in Scotland and these headline indicators are expected to worsen as the scheme is unwound. The increase in the Claimant Count rate to 7.9% in July provides a signal that unemployment has risen and incomes have fallen over the month.

While the scale of the economic shock is continuing to materialise as more data become available, business survey data are starting to capture the effects of easing of lockdown restrictions in June and July on business activity as further parts of the economy reopen.

The PMI's are showing that business activity in July is gradually stabilising, with the manufacturing sector slightly ahead of the services sector, reflecting in part the slower pace at which lockdown restrictions have needed to ease in consumer facing parts of the service sector. Retail sales remain significantly lower than last year, however the annual falls are softening as larger parts of retail have reopened. At a global level, business indicators are also starting to show similar stabilisation in activity as is being seen domestically, which should help to support further recovery in trade.

Looking ahead, however, there are clear challenges for businesses as to how they adapt to the changing trading environment as we move through the remainder of quarter three and into the final quarter of the year. Business optimism has improved as restrictions have eased, however many businesses expect to continue operating at reduced levels of capacity and with reduced staffing levels as the support schemes are unwound. This, alongside a possible resurgence of cases of coronavirus, represent the main downside risks to the recovery.