Monthly economic brief: March 2022

Overview

This month's economic brief covers developments over the first quarter of 2022 during which the situation in Ukraine – first and foremost a humanitarian crisis - has presented a new and concerning shock to the global economy, which risks further slowing the recovery from the pandemic and exacerbating inflationary pressures which have already risen to their highest levels in 30 years.

Latest headline indicators in Scotland have shown encouraging improvements at the start of the year. GDP grew 1.1% in January and rebounded sharply from the fall in output in December at the start of the Omicron wave. Latest business survey data have indicated further growth and recovery over February and March, with the resumption of full trading patterns in hospitality and leisure sectors increasingly widespread as most of the remaining restrictions on sectors have been gradually removed.

Scotland's labour market has also continued to perform strongly, with unemployment falling to 3.8% in November to January, while the payroll employee level rose sharply to 34,000 above its pre-pandemic level. High vacancy rates and recruitment challenges have continued to persist in February and March, creating upward pressure on starting salaries and average earnings growth.

However, inflationary pressures have continued to strengthen with consumer price inflation rising to 6.2% in February. With the increase in the energy price cap, inflation is forecast to rise to around 8%, and to remain high throughout the year presenting an extremely challenging outlook for household finances, and particularly for those on low incomes. This concern was reflected in the Scottish Consumer Sentiment Indicator which fell sharply in February due to weakening sentiment regarding household finances, spending and the outlook for the economy over the coming year.

Since then, the situation in Ukraine has increased the level of uncertainty in the economic outlook and presented a new downside risk to growth at a time when the economy is still in recovery from the economic shock of the pandemic. Scotland's direct trade links with Russia and Ukraine are small, and as such the direct impacts of the situation are expected to be limited. However, the recent surge and volatility in the price of global commodities such as oil and gas, grains and metals in which Russia and Ukraine are key global producers, means the indirect impacts of higher inflationary pressures is something that all importing economy's, including Scotland, will be exposed to.

Looking ahead, as a result of recent developments, the economic outlook is less positive. The Office for Budget Responsibility forecast that UK inflation could now peak at 8.7% in the final quarter of 2022 with the negative impact on real incomes and consumption resulting in their UK GDP growth forecast for 2022 being revised down by 2.2 percentage points to 3.8%. Similar impacts are evident in Scotland and will result in lower GDP growth than previously forecast.