Monthly economic brief: June 2022

Overview

This month’s economic brief provides an update on data during the second quarter of the year, in which slowing output growth, rising inflation and tight labour market conditions are very much shaping current economic conditions. Furthermore, conditions are forecast to weaken over the coming year, presenting an increasingly challenging economic outlook for households and businesses.

During the first quarter of 2022, Scotland’s output growth held up relatively well, growing 1% (UK 0.8%) as the economy transitioned through the Omicron wave and remaining Covid restrictions were removed. However monthly data indicates a gradual slowing in growth over this period with output falling 0.5% in April, the first fall in output since December 2021. Business survey data points to a further easing in business activity growth between April and May.

Over the period February to April 2022, Scotland’s labour market has remained tight with unemployment at 3.2%, its joint lowest rate in the time series, while the payroll employee level continued to rise in May and is now 37,000 above its pre-pandemic level. Ongoing high vacancy rates however remain a key feature of the labour market with business survey data indicating that 38% of businesses were experiencing a shortage of workers in June.

Inflation has risen to 9.1% in May, the highest UK rate since 1982. The rise in inflation has been broad based with large increases in energy, fuel and food prices and continues to be exacerbated by the impacts of the war in Ukraine on global energy and commodity markets. Furthermore, latest projections from the Bank of England expect inflation to rise further later in the year to above 11%, largely as a result of rises in energy prices associated with the energy price cap.

This is presenting significant cost of living challenges for households with mean real PAYE earnings falling over the year in April. The impact on household incomes is very much reflected in Scotland’s consumer sentiment indicator which has fallen sharply since the start of the year to its lowest level since March 2021 and highlights the risks to consumption growth going forward.

Business trading conditions also continue to be extremely challenging. While business survey data present some indications of improved cash reserves at an aggregate level, turnover continues to be impacted by the increased cost of materials, energy and labour, with 37% of businesses reporting that they are having to pass on increased costs to customers. Business sentiment has eased since the start of the year amid concerns that existing supply side challenges are accompanied by a fall in demand over the coming months.

Looking ahead over the next two year period, forecasters have upgraded their inflation forecasts and downgraded growth forecasts which means that the economic outlook is challenging.