Monthly economic brief: March 2021

Business Activity

Business activity has fallen sharply at the start of 2021 as lockdown restrictions were introduced in mainland Scotland and across the UK, requiring many businesses to temporarily close.

Proportion of business trading^[2] 

• Following the national lockdown in 2020, the easing of restrictions during the second and third quarters of 2020 enabled many businesses to gradually reopen, and by the start of October, the proportion of business reporting as trading had risen to 97%, up from 79% in June. 
• However, this proportion fell over the fourth quarter of 2020 again as regional restrictions were introduced, and fell sharply in January 2021 as lockdown restrictions were introduced across mainland Scotland.

• Latest data for February and into the start of March show the proportion of businesses currently trading has remained broadly stable at around 82% during the current lockdown restrictions, down from around 90% in December.

• There has been a fall in the proportion of businesses trading across most sectors since December, reflecting the broad impact that lockdown restrictions have had on the economy.  The sectors with the most significant falls and the lowest shares of businesses trading have been in the consumer facing sectors that have been required to close or most directly impacted by restrictions.  These include Accommodation and Food Services (33%), Arts, Entertainment and Recreation services (50%) and Wholesale, Retail and Repair of Vehicles (88%).

Business output

• The impacts of the current lockdown restrictions have also been reflected in the Purchasing Managers Index (PMI)^[3] business survey which reported a sharp fall in business activity in January followed by a further, though more moderate fall in February.
• The recent fall in business activity has been significantly less sharp than during the national lockdown in 2020 likely reflecting the difference in lockdown restrictions and that businesses have adapted to working with restrictions.
• At a sector level, manufacturing activity has weakened since the start of the year, though remains notably stronger than Service sector activity, which has been more directly impacted by the restrictions and in which activity has fallen for five consecutive months.

• Looking to the year ahead, business optimism has strengthened significantly in recent months reflecting positive developments on the vaccine roll out and improved expectations for an economic recovery.

Trade

• The pandemic and restrictions on activity has had significant impacts on international demand and supply chains in 2020, which coupled with the end of the EU Exit transition period has resulted in extremely challenging trade conditions.

• In 2020, the value of Scotland's annual international goods exports was £26.6 billion, down 21.3% compared to 2019, with falls across a range of commodity groups, including oil and gas exports (-40.8%), beverages (-19.8%) and food (-6.9%).^[4]
• In terms of export destination, Scotland's goods exports to the EU fell 18.1% to £13.7 billion while exports to non-EU countries fell 24.4% to £12.9 billion.
• More recent UK trade data for January and BICS survey data for February provide more timely insights on trading conditions at the start of the new year following the end of the EU Exit transition period.  The following box uses these sources to consider early indications of EU Exit impacts.

Early Indications of EU Exit Impacts

Since the 1st January 2021, new trade barriers have been in place between the UK and EU. These include both non-tariff barriers to trade and tariffs where exports do not meet rules of origin conditions.^[5] These changes occurred whilst the UK and countries across the EU were introducing further public health restrictions, which makes it difficult to isolate their impact, particularly at a regional level where trade data is less timely. Some of the latest data are discussed below.

Business Insights and Conditions Survey (BICS)

Data from BICS^[6] for February/March suggest that 36% of exporting businesses in Scotland experienced lower exports than normal, while 6% were unable to export at all. 65% of those experiencing challenges attributed this to EU exit, while 4% attributed this to COVID-19, and 25% to a combination of both. 

When asked about how exports have been affected, the most significant challenge exporting businesses reported was additional paperwork at 53%. Following this, customs duties (42%) changing transportation costs (38%), and disruption at UK borders (23%) were all reported.

Trade in goods has been particularly affected by EU-exit, with over 64% of businesses in wholesale and retail and manufacturing citing additional paperwork as a challenge. Services sectors were less likely to cite border issues as challenges, although these sectors could still be affected by issues such as recognition of professional qualifications. 

UK overseas trade statistics: January 2021 (OTS)^[7]

UK exports of goods to the EU in January 2021 were 43% (£5.9bn) lower than January 2020, while imports from the EU over the same period were 21% lower (£4.1bn). Although the pandemic will be affecting EU trade, these falls were larger than the impact seen on trade with non-EU countries, where exports and imports both fell by around 8% compared to January 2020. 

Focussing on some of Scotland's main commodity exports, exports of Scotch Whisky to the EU were 61% lower than last year, and exports of salmon 98% lower.

The striking difference in January's data for EU and non-EU trade could be early evidence of the initial impact of EU exit and the challenges identified in the BICS survey. However, it is also important to recognise other factors that could be influencing these changes in trade, such as the way EU exports have been collected, with data for January the first to be collected using customs exports declarations, and stockpiling at the end of 2020. 

The implications for long term UK-EU trade remains uncertain. Evidence of some businesses avoiding EU trade altogether in January could suggest some of this trade may recover throughout the year as businesses adjust to the new trading requirements. On the other hand, the new administrative and regulatory checks with the EU will permanently increase the cost of trade, likely resulting in lower trade levels for years to come.