Monthly economic brief: September 2021

Overview

This month's economic brief provides an update on data that begins to show how the economy has been performing during the third quarter of the year. During this period Scotland has moved to beyond level 0 restrictions but has also seen the further emergence of supply chain and staff shortages and a pick-up in inflationary pressures as the economy continues through this phase of the recovery.

The latest data for July show Scotland's GDP fell 0.2% over the month, following five consecutive months of growth in which we've seen a period of particularly strong growth in consumer facing services as restrictions have eased and businesses have reopened. Services output continued to grow in July, though at a slower pace than the rapid growth seen following the initial easing of restrictions. However this was offset by further falls in manufacturing and construction sector output which have faced intensifying supply chain disruptions and cost pressures, although manufacturing output remains above pre-pandemic levels.

This in part reflects global factors as demand has gathered pace leading to pressure on the availability and cost of materials alongside notably longer supplier delivery times as supply chains and logistics continue to adjust. It also reflects labour supply shortages, and in particular the shortage of hauliers, which has intensified as the economy has reopened and demand has continued to recover. In turn these have led to a pick-up in inflationary pressures with signals of higher input prices being partly passed through to consumers. However, base effects continue to strongly influence the data also.

At an aggregate level, the labour market has continued to strengthen during the third quarter, supported by the furlough scheme. The unemployment rate remained low at 4.3% in May to July and more recent data for August show the number of payrolled employees has continued to rise while there has been further falls in the claimant count. While both indicators remain weaker than their pre-pandemic levels, demand for both permanent and temporary staff continued to increase in August with labour and skills shortages emerging in sectors including haulage, construction, tourism, hospitality and food and drink. These are, in part, temporary imbalances as the economy continues to re-open, adjust and recover from the unprecedented impacts on economic activity over the past 18 months. However, in some cases there are longer-standing recruitment challenges in sectors, which alongside the impact of EU exit on migration and labour supply, ultimately present longer term challenges.

The closure of the furlough scheme at the end of September represents an additional element of uncertainty to the labour market outlook. The scheme has provided critical support in retaining jobs and incomes since the start of the pandemic and in January was supporting almost 400,000 jobs in Scotland. This has fallen to 116,500 jobs at the end of July as the economy has reopened and the latest forecasts from the Scottish Fiscal Commission expect the closure of the scheme to partly contribute to a rise in unemployment to 5.3% in the final quarter of the year.

Taken together, supply chain and recruitment bottlenecks are to be expected at this stage of the recovery as the supply side of the economy catches up with the recovery in demand. While there will be fluctuations in the data and revisions should be expected, the Scottish economy is recovering and in July, GDP was 2.4% below its pre-pandemic level. Consumer facing services sectors remain furthest below and some continue to have the highest number of staff on furlough. The easing of restrictions in August, alongside further strengthening in Scottish consumer sentiment provides scope for optimism for further recovery in those sectors. However, risks to the outlook remain, particularly as fiscal support starts to unwind.