Monthly economic brief: July 2020

Overview

This month's Economic Brief provides updated analysis for Scotland as the economy progressed through phase 1 of Scotland's recovery route map with the gradual easing of lockdown restrictions at the start of phase 2 in June, highlights risks going forward and presents new measures of economic activity.

The impact of the pandemic and lockdown measures on Scotland's economic output has been rapid and severe. GDP fell 18.9% in April, the first full month of lockdown, and around 23% over March and April combined. The speed and scale of this is unprecedented relative to previous economic crises, however the context is different as around one fifth of businesses had been required to close during this period with over 600,000 workers furloughed.

The latest business surveys have signalled that business output in Scotland has continued to fall sharply in May, though to a lesser extent than in April, with UK survey data also signalling stabilisation in June.

This is to be expected as lockdown restrictions have eased and businesses have begun to resume operations albeit in different circumstances. This pick-up in activity is particularly evident in the manufacturing and construction sectors to date while activity in the services sector, and particularly those in consumer facing industries, appears more gradual.

That said, it is clear activity is restarting from a very low base and that underlying demand in the economy remains extremely weak. New business and orders, domestic and export, have continued to fall, which presents ongoing significant risks to business balance sheets, debt levels and the labour market. Therefore recovery will remain protracted through this year and into 2021.

The Scottish Government's Monthly Business Turnover Index for May showed a further fall in business turnover across almost all industries (except for food retail) and in the first half of June, almost 40% of businesses reported having cash reserves of less than 6 months. Our sectoral viability modelling indicates the scale of the impact on profitability of sectors in Scotland and the extent to which Government support, particularly the Job Retention Scheme (JRS), has been essential for protecting businesses, income and employment across sectors of the economy.

The JRS has also kept the official headline unemployment levels relatively low, however challenges remain in the labour market as businesses transition to reopening and seek to reduce costs amid ongoing weak demand. The unemployment rate in the 3 months to April was 4.6%, however the claimant count almost doubled between March and May to a rate of 7.8%, signalling that unemployment has risen and incomes have fallen.

Alongside this, survey data signal that labour demand has continued to fall sharply in June, albeit to a lesser extent than in April and May, while a sharp rise in staff availability signals that redundancies have increased. Some form of on-going wage support will be required particularly for sectors re-opening into much weaker markets.

There is evidence also emerging that this has started to put downward pressure on earnings growth and starting salaries, which alongside higher unemployment and subdued consumer sentiment, is a key risk to a consumer led recovery.

As we also move towards formally exiting the EU transition period (31 December 2020) uncertainty regarding future trade arrangements with key markets has the potential to impact already weakened business sectors and have a significant impact on economic activity, particularly if there is no deal.

Finally, real time economic indicators remain critical for what continues to be a rapidly evolving global health and economic crisis. Next week, we publish monthly GDP data for May, the second full month of lockdown, while further business surveys provide new insights into how business and consumer activity is responding. In this report, we also provide details of a new Scottish economic index which we have developed to track and monitor impact. It is designed to capture forward expectations and is helpful for signalling changes in the economy using high frequency data. It signals recovery is happening in Scotland but at a gradual pace.