Monthly economic brief: July 2020

Business Turnover

The closure, scaling down of business operations and fall in demand during lockdown has resulted in significant cashflow challenges for businesses.

Monthly Business Turnover Index^[10]

• Over the year to May 2020, business turnover in Scotland fell sharply for most companies across almost all sectors. Furthermore, turnover decreased for the third consecutive month, albeit to a lesser extent than in April (24, up from 19).
• Business turnover continued to fall across both the manufacturing (29) and service (23) sectors in May, with the manufacturing sector strengthening by slightly more compared to April.
• Within the services sector, turnover continued to fall across all service industries except for Food Retail, in which turnover growth strengthened over the month. The Accommodation and Food Services continued to be the industry with most businesses reporting a decrease in turnover, followed by Culture, Recreation and Other Services, which was the only service sector industry to see turnover weaken compared to April.
• The slight improvement from April is in keeping with other business indicators signalling an increase in business activity as businesses started to plan for easing of lockdown measures. However, the broad based falls in business turnover continue to emphasise the precarious cashflow position that many businesses are facing.

Cash reserves of business

• The fall in turnover has resulted in businesses using their cash reserves to accommodate ongoing costs for the business.
• Of the Scottish businesses that had not permanently stopped trading in the first half of June, 38% of businesses reported having cash reserves to last between zero to six months (UK: 43%), while 36% of Scottish businesses had cash reserves to last more than 6 months (UK: 33%).^[11]
• 4% of Scottish businesses reported they had no cash reserves (UK: 4%), which is slightly higher than reported in the first half in May (2.9%) and reflects the ongoing financial challenges facing businesses.

Business dissolution

• Quarterly Companies House data for Scotland reported a slight increase in the number of company dissolutions in Q1 2020.
• Between January and March 2020, there were 6,378 dissolutions in Scotland (UK: 136,978). Compared to Q4 2019, the number of dissolutions increased slightly by 1% (UK: +13%).
• Monthly data, which is only available for the UK as a whole, for March 2020 showed that the number of dissolutions increased by 7,453 (23%) compared to March 2019.

Sectoral Viability Modelling

COVID-19 has had a significant impact on economic activity in Scotland with the requirement to strictly close approximately 20 per cent of businesses during lockdown and the need for other sectors to restrict or change how they operate.

We know from the macro level analysis and the economic data published to date that output (GDP) produced in Scotland over March and April contracted by approximately 23%. We have also seen a rising number of redundancies across sectors with businesses restructuring (retail etc.) to reopen in different market circumstances.

Below the aggregate data, there are clearly different sectoral impacts with those most affected reflecting their ability to trade during the pandemic. For example, output for accommodation and food services was estimated to have contracted by nearly 80% in Scotland during April. Similarly, construction output fell by 40% while other sectors experienced much smaller contractions with the exception of food retail which increased.

To better understand the sectoral impacts and the profitability and viability of sectors of the economy, OCEA has developed a framework for assessing how the pandemic and lockdown could affect business viability across different sectors of the economy. The model framework allows us to simulate the impact of lockdown directly on viability (turnover, cashflow, profitability and employment) and illustrate the impact of Government support such as rates relief, job retention scheme and related grants.

As an illustration, the chart below models the impacts on business profitability that the Job Retention Scheme and NDR Rates Relief has had across aggregate sectors of the economy.^[12]

The initial results highlight both the importance of the immediate Government support to sectors of the economy, but also the risks that remain for those sectors not operating at previous levels. As the economy re-opens we will continue to monitor the impact on sectoral viability as turnover improves but also as the various government schemes are withdrawn or wound down. We will provide further updates on this analysis which links to our broader macro modelling work.