Monthly economic brief: October 2020

Overview

This month’s Economic Brief provides an update on Scotland’s economy into the third quarter of the year, during which the economy continued to resume activity as national lockdown restrictions were eased. However the path of recovery continued to differ by sector as local restrictions influenced the level of economic activity in some sectors.

The latest GDP data shows that the Scottish economy grew for the fourth consecutive month in August and over that period recovered around 60 per cent of the output lost during the unprecedented falls in March and April. However, like the UK as a whole, the pace of growth slowed notably in August with output rising by 2.6 per cent over the month, down from over 6 per cent growth in July.

Slower growth was evident in both the Services and Construction sectors, alongside a slight fall in output in the Production sector, highlighting the gradual pace at which output will return to pre-pandemic levels. Overall, GDP remained 9.4 per cent below its level in February, however, the scale of the impact on output during national lockdown, the subsequent pace at which demand has recovered and the need for local restrictions means that sectoral differences are already emerging.  For example, Accommodation and Food Services output was 31 per cent below its level in February while Construction output was 9 per cent below and Manufacturing 5 per cent.

The latest Purchasing Managers Index signalled that slower growth continued into September with the Services sector in particular reporting only marginal growth. Furthermore, trading conditions remained extremely challenging for businesses with business turnover remaining significantly lower than last year. While the economy continued to transition from national lockdown over this period, Government support has remained a critical factor in helping businesses to retain jobs and provide flexibility during this period in which many businesses have needed to operate below capacity.

At the end of August, 242,600 employments in Scotland were on furlough, supporting the unemployment rate to remain low at 4.5 per cent in June to August.  However, the claimant count remained 8 per cent in September, with payrolled employments around 63,000 lower than last year, further emphasising the underlying challenges that are emerging in the labour market during this pandemic and the need for ongoing support to help mitigate the worst impacts. Unemployment is still expected to rise this year as the furlough scheme is replaced by the Job Support Scheme at the start of November, however the latest recent changes that have been made to the scheme should result in a more limited negative impact than initially feared.

This has an important feed through to expectations for consumption in the final quarter of the year, particularly in the lead up to the festive season which is so important for the retail sector.  Retail sales remain significantly down on last year, however have continued to stabilise in recent months.  However, amid such uncertainty in the labour market and for household incomes for the coming year, the household savings ratio has risen to a record high level, while consumer sentiment is at historically low levels and remains a downside risk to the outlook for consumption.

More broadly, the short term outlook for the final quarter of the year remains notably uncertain as cases rise in Scotland, the rest of the UK and internationally. This has been reflected in weakening business and consumer optimism which eased back in September, and presents even greater uncertainty for the medium term outlook.