Monthly economic brief: July 2021

Overview

This month’s economic brief provides an update on data covering much of the second quarter of 2021. While it is too early to see the impacts of the easing of restrictions (level zero) that came into effect in Scotland on 19 July, the indicators for the period April to June capture the pick in demand for consumer facing services such as in non-essential retail and parts of hospitality.

The latest GDP data for May show further growth in Scotland with overall GDP growth of 0.9% over the month. The strongest contribution to growth was from accommodation and food services while there was further growth from non-food retail and other consumer facing services which continued to benefit from the easing of restrictions on non-essential retail in April.

Overall, Scotland’s GDP is back to 2.7% below its pre-pandemic level in February 2020 and is at its highest level since the start of the pandemic. The recent strong growth in consumer facing sectors has supported this recovery, however output from sectors such as accommodation and food and arts, culture and recreation remain furthest below their pre-pandemic levels of output. In contrast, output from sectors such as construction, manufacturing and parts of the services sector (e.g. financial and insurance activities) were above their pre-pandemic levels in May, continuing to emphasise the K-shape nature of the recovery across sectors.

Business surveys for June and into the start of July continue to signal this pattern of recovery continuing, though at a more stable and moderate pace than the sharp pick up we saw in April and May as restrictions were lifted. In the first half of July, 98% of businesses reported they were currently trading, however the proportion of firms reporting lower than normal turnover has remained relatively stable since June. On the consumption side, consumer sentiment has continued to strengthen, though the pace of retail sales growth softened compared to April (however is notably above pre-pandemic levels). Despite higher retail sales, visits to retail and recreation have remained on average 6% below pre-pandemic levels since the start of June, with some city areas in particular seeing larger fall offs. With online sales remaining elevated, and business surveys suggesting greater use of home working will remain in future, some of these differences may begin to reflect further patterns of change in the economy.

As restrictions have eased and businesses have further resumed trading, we have seen notable improvements in many labour market indicators, with the number of jobs on furlough falling sharply and an increase in recruitment activity to meet the pick-up in demand. In June, while both indicators remained weaker than their pre-pandemic levels, the number of payrolled employees in Scotland rose to its highest level since March 2020 while the claimant count has continued to fall to its lowest level over the same period. The latest UK data also show increased growth in payrolled employees aged 18-24 over May and June, an encouraging sign for a demographic which has been particularly hard hit in the labour market during the pandemic so far.

Looking ahead, the further easing of restrictions in August with potential easing in physical distancing and graduated return to previous working will continue to influence the level and pace of output. Over half of the remaining jobs on furlough are on a flexible basis, suggesting that many businesses are transitioning back to trading gradually and are ready to step up production or services as required. This flexibility is important given both the ongoing uncertainty for some firms about the pace at which demand will continue to strengthen and the pace at which operating capacity is expected to increase. Alongside this, the Scottish consumer sentiment indicator returned to positive in June, reflecting the renewed confidence of households at this time.