Monthly economic brief: July 2020

Business Activity

Business surveys are providing insights into the impacts that physical distancing and lockdown measures have had on business activity and cash flow in Scotland during May and the start of June.^[2]

Proportion of business trading

• Lockdown measures have required many businesses to close or scale down activity since March, either directly or indirectly, through a collapse in demand.
• In the first half of June, 14% of businesses in Scotland reported that they were temporarily closed (UK: 14%) and 85% reported that they were currently trading (UK: 86%).^[3]
• The proportion of businesses reporting being temporarily closed has fallen from 19% in the first half of May. Latest data shows that 7% of businesses in Scotland had started trading again within the previous two weeks after a pause in trading.
• Further restarting of business activity was signalled at the start of June with 4% of businesses in Scotland reporting that they were paused trading but intending to restart in the next two weeks, however 10% reported that they did not intent to restart over the period.

Business activity

• The RBS Purchasing Managers Index (PMI)^[4] reported that business activity across Scotland's private sector fell sharply in May (21.1)^[5], however to a lesser extent than the survey record fall in April (10.7).
• The services sector continued to report a sharper fall in output than the manufacturing sector with both sectors strengthening from April, but remaining below their levels in March. Businesses continued to link the fall in activity to temporary business closures and weak client demand.
• The UK PMI for June reported further stabilisation in business activity over the month with the UK index rising to 47.7 in June, signalling a notably softer fall in output than in the previous 3 months.^[6] At a sector level, this was driven by the restarting of business activity in the manufacturing (and construction) sectors, while the services sector continued to report a fall in output with parts of consumer service and leisure activities remaining closed.
• While the business surveys signalled stronger activity as businesses restarted after being closed, underlying demand indicators remained more subdued with new orders/business stabilising at a slower pace, particularly export orders, while businesses also continued to reduce staffing levels while seeking to control costs amid weak demand.

Trade

• On the back of significant global trade headwinds in 2019 and Brexit uncertainty, many businesses have faced further trade disruption in 2020 due to the pandemic and lockdown measures across countries.
• In April 2020 (compared to April 2019) the value of Scotland's goods exports fell 32% (UK: -31%) to £1.9 billion, while Scotland's imports fell 22% (UK: -32%) to £1.5 billion over the same period.^[7]
• The decrease over the year likely reflects large decreases in the UK exports of key commodities for Scotland including whisky (-40%), salmon (-58%), oil (-49%) and gas (-74%).
• The changes in exports and imports over the past year have varied by destination/origin. In terms of trade with the EU, Scotland's goods exports to the EU decreased by 11% (UK: -32%) compared to April 2019, while imports from the EU decreased by 18% (UK: -39%).
• Scotland's goods exports to non-EU countries decreased by 46% (UK: -31%) compared to April 2019, while imports from non-EU countries fell 26% (UK: -24%).
• ONS data^[8] suggests that subdued trade activity continued into the first half of June with 53% of Scottish trading exporters reporting that they were exporting less than normal and 47% of Scottish importers. This was broadly in line with the UK as a whole (52% of exporters and 44% of importers).

Real Time Economic Impact Index

COVID-19 has resulted in an economic crisis in Scotland, through the direct impact on the economy but also the secondary impacts on health and society from a weaker economy.

The impact of COVID-19 is not constant, and will be changing over time, depending on the prevalence of the virus and the severity of the restrictions required to protect against it. Most traditional measures of the economy do not provide a real time assessment, instead looking over longer periods such as a month or a quarter. They are therefore less useful when assessing the impact of the different phases of the virus.

In order to monitor the current level of economic impacts arising from COVID-19 we have developed a Real Time Economic Impact Index, which uses a set of high-frequency indicators to report on economic impacts by week. Any assessment of the economic impact of COVID-19 will be very uncertain, and to address this we look across a range of indicators in 3 broad groups^[9]:

(1) Demand Indicators - measuring the changing demand across different sizeable sectors of the economy due to changing behaviours and restrictions:

• Electricity demand
• Non-residential real estate sales
• Consumer transactions

(2) Supply Indicators - measuring the disruption to supply chains and workforce participation:

• New Universal Credit claims
• Heavy Goods Vehicle (HGV) traffic counts

(3) Forward looking Indicators - measuring levels of uncertainty and future expectations:

• FTSE250
• Brent Crude Oil Price
• UK Economic Policy Uncertainty Index

The overall index is derived by weighting each indicator according to their volatility since the start of 2019. When the index is below 1 economic impact is negative and when the index is at or above 1 the economy has returned to operating as normal (compared to January).

As can be seen, the Real Time Economic Impact Index deteriorated before lockdown was introduced, highlighting the importance of market expectations. It reached its lowest level of 0.33 in the week ending 29th March. However, it has been rising gradually since, reaching 0.71 in the week ending 28th June. It is forecast to increase further to 0.73 by the week ending 5th July. It increased slightly faster following the move to Phase 1, although there has yet to be a notable impact from the move to Phase 2. This may reflect that the restrictions in Phase 2 are being lifted gradually, and many shops had not reopened by the end of June.

Looking across the different indicators it can be seen that the HGV index has returned to January levels, while non-residential real estate sales remain significantly down on January levels.

There is considerable uncertainty regarding the economic outlook and monitoring real time impacts is another approach to complement other economic data.