Monthly economic brief: February 2022

Overview

This month's economic brief provides latest insights on the Scottish economy in the closing months of 2021 and into the start of 2022. Over this period, we have seen a short-term disruption to the economic recovery from the pandemic from the Omicron variant and the necessary tightening of public health restrictions during December and January, although there are encouraging signs that this disruption has been short lived. Overall, looking at 2021 as a whole, GDP grew 7% over the year, only partially recovering from the 10% fall in 2020, in part because of the short term disruption from Omicron at the end of the year.

Scotland's GDP fell 0.4% in December with flat services output and growth in construction offset by a fall in production output. Consumer-facing services' output fell over the month, likely in part reflecting the impacts of Omicron uncertainty and restrictions on the sector, while falls in manufacturing and electricity and gas weighed on output from the production sector.

Despite the fall in output in December, Scotland's GDP remained slightly above its February 2020 pre-pandemic level, though the pace of recovery continues to vary notably by sector.

Looking to the start of the new year, there have been some positive signs of recovery with business survey data showing some strengthening of activity in the services sectors, which were most impacted by Omicron restrictions. January also saw an improvement in consumer sentiment, with households seeing an improved outlook for the economy, as restrictions began to be eased at the end of January, following the successful rollout of booster jabs from December.

Scotland's labour market continued to perform strongly at the end of the year, with unemployment remaining low at 4.1% in October to December. Payrolled employees also continued to increase in January, though only slightly, and remain over 14,000 higher than they were before the pandemic.

Ongoing challenges and headwinds persist, however. Inflationary pressures have continued to strengthen with inflation rising to 5.5% in January. With the forthcoming increase in the energy price cap, inflation is forecast to rise further in April, to around 7%, and is presenting an extremely challenging outlook for household finances, with many households facing falls in their real incomes at a time that both National Insurance and VAT on hospitality are rising.

Many firms also continue to report difficulties with recruitment challenges and labour market shortages, although there are some signs of these pressures lessening slightly with the pace of vacancy growth starting to ease. Similarly, whilst supply chain challenges remain, there are signs of some stabilisation in cost pressures in business surveys.

However, looking ahead, the current geopolitical situation means that the global economic outlook is increasingly uncertain, with financial markets likely to be disturbed, growth potentially weaker and with the prospect of higher inflation pressures as energy and other commodity prices rise further.