Monthly economic brief: July 2021

Business Activity

Business activity has strengthened as lockdown restrictions have eased in April/May.

Proportion of business trading

• The phased easing of restrictions over April and May has seen a sharp increase in the share of businesses trading, driven by the reopening of businesses in consumer facing services sectors (hospitality, leisure, non-essential retail) which had closed during lockdown.
• At the start of July, an estimated 98% of businesses in Scotland were trading.^[2] This has remained broadly stable since the start of June, however is notably higher than the recent low point of 82% during lockdown in January and is at its highest rate since comparable estimates began in June 2020.

• The largest increases since April have been in the accommodation and food services sector (up 56 percentage points to 92%) and the arts, culture and recreation sector (up 47 percentage points to 98%). Non-consumer facing services sectors (e.g. information and communication) and manufacturing and construction have been less impacted by restrictions with over 98% of business trading over this period, reflecting the ability to continue operations through home working and/or adapting operations to the restrictions in place.
• The rate of increase in those trading in consumer facing sectors has naturally slowed since June as the proportion trading approaches 100%.

Business output

• The increase in businesses trading is reflected in the Purchasing Managers Index (PMI)^[3] business survey which reported a further increase in business activity in June, albeit at a slower pace than in May, with positive growth across the services and manufacturing sectors.
• Growth in June continued to be slightly higher in the services sector, supported by a sustained increase in inflows of new work as the easing of restrictions on parts of the sector over April enabled it to close some of the gap with the manufacturing sector.

• While growth in activity and demand continues to strengthen across the economy as a whole, at this stage of the recovery, the capacity at which business are operating and the turnover generated compared to what would be normally expected, continues to differ notably across sectors.
• At the start of July, 33% of businesses reported having lower turnover than normal for the time of year, while 41% reported that turnover was not affected and 13% reported that it had increased.^[4] However, the accommodation and food sector has the highest proportion of firms (68%) reporting that business turnover is lower, followed by the arts, entertainment and recreation services sector (61%).

• There are indications that conditions have improved since March as restrictions have eased. For example, the proportion of business overall reporting lower turnover has fallen from around 45% to 33%, while the proportion reporting a rise in turnover has increased from around 6% to 13%. However the rates have remained relatively stable since the start of June suggesting that overall trading conditions remain challenging alongside the specific challenges that different sectors are facing at their stage of recovery.
• Looking to the year ahead, the PMI business survey for June showed that levels of business optimism had eased back from recent months, however remained elevated overall, with strong expectations from businesses of further strengthening in business activity to come over the year. The flash UK PMI for July signalled further growth in UK business activity going into the third quarter, however also flagged a further slowing in the pace of growth across the private sector during the month.^[5]

Trade

• Scotland’s international trade in 2021 has been impacted by a combination of the pandemic and the end of the EU Exit transition period and the start of the new trade agreement between the UK and EU which includes the introduction of new regulatory and administrative compliance checks on goods trade.
• In the first quarter of 2021, the value of Scotland’s goods exports were £6.2 billion, down 15.2% compared to Q1 2020, while imports were £5.3 billion, down 3% over the same period.^[6]

• The fall in exports was mainly driven by a 36% fall in exports of oil and gas, with notable falls across other commodities including food (-20%) and beverages (-2.9%). However, there was a 19% increase in exports of chemicals.
• Isolating the impacts of the pandemic and EU exit on trade in 2021 is challenging due to the impacts of public health restrictions on demand for goods and services as well as international supply chains, which is further complicated by the volatility in trade patterns due to periods of stockpiling prior to and during the EU Exit transition phase.
• Comparing the first quarter of 2021 to the first quarter of 2018 (the most stable recent period when trade was not impacted by the pandemic and the end of the EU transition period), total Scottish goods exports fell 15.5% with exports to the EU falling 21% and by 8.9% to non-EU countries. The difference is largely driven by falls in oil and gas exports, however key commodity groups saw larger falls in exports to EU countries than non-EU countries (-28.7% compared to -2.5% for food and -10.8% compared to 2.7% for beverages).
• More recent monthly UK data for May^[7] signals that trade to both EU and non-EU countries has strengthened from the falls at the start of the year, with total goods exports rising 3.7% over the month. However goods exports in 2021 so far (Jan – May) remain 11.9% below the equivalent period in 2018 and key exporting sectors for Scotland have followed this pattern. In May, exports of Scotch Whisky were up 24% over the month (the first five months of 2021 were 12% down on the same period in 2018), while exports of fish rose 6% (the first five months of 2021 were 22% down on same period in 2018).

• More recent business survey data into the first half of July also indicates some improvement in trade with 55% of Scottish businesses reporting to be exporting as normal for the time of year (up from 42% at the start of February) while 26% were exporting less than normal (down from 38% at the start of February).^[8]