Monthly economic brief: October 2020

Consumption

Consumer sentiment and consumption activity have been significantly impacted in 2020 by the coronavirus pandemic and restrictions on activity impacting both supply and demand.

Consumer sentiment 

• In Q3 2020, the Scottish Consumer Sentiment Indicator stood at -18.8, indicating that consumer sentiment was on balance negative and at its lowest point in the quarterly time series.^[31]
• The low level of consumer sentiment in Q3 was driven by sentiment regarding the current performance of the economy, current security of household finances and current relaxedness about spending being at their lowest levels in the time series and is reflective of the unprecedented economic shock that has resulted from the coronavirus pandemic.

• Looking ahead to the next 12 months, respondents expectations about the economy and their household finances have been less negatively impacted, and on balance expect them to be performing better in a year’s time than now. There is significant uncertainty for the economic outlook and going forward, the future expectations indicators will likely be sensitive to ongoing impacts of the pandemic.

Retail sales

• Scottish Retail Consortium data^[32] on retail sales for September reported an annual decrease of 6% in total retail sales in Scotland, improving slightly from the 7.5% annual fall in August and further strengthening from the record fall in April (40.3%). 

• The decline in retail sales in June was mainly driven by a fall in non-food retail sales. Over the year to September, non-food retail sales fell by 14.2%, while food retail sales increased by 3.7%.
• The combination of restrictions, increased pressure on incomes, subdued sentiment and heightened uncertainty are factors continuing to impact on consumer activity.

Household Saving and Consumer lending and repayments

• The household saving ratio (the proportion of disposable household income available for saving or paying off debt) increased significantly to 27.8% in Q2 2020, up from an average of 5.3% in 2019.

• Whilst in the second quarter of 2020, total household income fell by 1.6% compared to the same period one year ago, consumer spending fell significantly more (-25.1%). As such, the savings ratio significantly increased to its highest rate on record.^[33] 
• The ONS savings ratio for the UK, also reported a substantial increase in the savings ratio to 29.1% in Q2 2020, compared with 9.6% in Q1, as household expenditure fell by nearly a quarter. 
• Between March and June, households on aggregate repaid more consumer credit than they took on in new borrowing and more recently the strengthening in economic activity in July and August as businesses reopened was reflected in a return to consumers’ positive demand for credit.^[34]

• However, net consumer credit borrowing turned negative again in September (-£0.6 billion), reflecting ongoing weakness in consumer spending.

Inflation and interest rate

• The collapse in demand, alongside the fall in oil price to record lows placed downward pressure on inflation in the first half of 2020 and which has remained low into the third quarter of 2020.

• The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 0.7% in September 2020, up from 0.5% in August 2020 but down from 1.8% at the start of the year.^[35]
• Key contributions to the latest increase in the inflation rate came from rising prices for transport and restaurants & café prices following the end of the Eat Out to Help out Scheme at the end of August.  
• The Bank of England maintained the Bank Rate at 0.1% in September 2020^[36] and in their current central scenario analysis project inflation to fall to 0.25% in 2020 before rising to 1.75% in 2021 and 2% in 2022.