State of the economy: September 2020

Overview

Economic activity in Scotland and globally has begun to recover from the unprecedented falls in output during the first half of 2020, which followed the restrictions imposed in March to manage and reduce the spread of coronavirus. However, the extent of economic recovery in the coming months remains highly uncertain, as new restrictions are introduced and coronavirus cases begin to increase across Europe and beyond.

The latest data show that while economic output remains 10.7% lower than pre-pandemic levels, the Scottish economy grew for the third consecutive month in July, at 6.8%, and has now recovered more than half the fall in output we saw in March and April. Headline labour market measures of employment and unemployment have held up primarily as a result of the substantial Government support through the furlough scheme, with around 15% of employees in Scotland still furloughed in August. The new Job Support Scheme will provide less extensive support for the next six months and is not likely to be as effective at suppressing unemployment as the original furlough scheme.

Global economic uncertainty remains high, and risks to the outlook are very much skewed to the downside. Trading conditions, particularly for those sectors that have been disproportionally impacted, remain extremely challenging with many operating at reduced levels of capacity and facing ongoing cashflow challenges. This is reflected in wider labour market indicators with businesses reporting reductions in staffing levels and downward pressure on wages to adapt to lower levels of demand. The variation in how sectors are faring is striking and recovery is likely to be slow for many parts of the economy.

Looking ahead, the economic data suggest that the recovery should continue into the third quarter. However there is greater uncertainty for the fourth quarter, with downside risks from a second wave of coronavirus cases (domestic and global) and further local and international restrictions, as well as a possible failure to agree a trade deal with the EU.

This edition of the State of the Economy provides an update to our economic scenario analysis over the medium term, acknowledging that uncertainty surrounding economic projections at this stage of the pandemic remains elevated. In the short term, our central scenario is for economic output in Scotland to fall 9.8% in 2020, broadly in line with the Bank of England's projection for the UK, while unemployment in Scotland may peak at around 8.2% in the fourth quarter. This will be heavily influenced by the ability of the Job Support Scheme to retain levels of employment during a period in which many jobs may not be considered viable and the extent to which businesses may need to restructure and reduce staffing levels, both in response to weak demand and structural changes to how the sector is operating as a result of the crisis. Recovery in the medium term is still expected to be gradual with economic activity returning to pre-crisis levels by the end of 2023.

The path for the economy remains fragile, particularly as restrictions on business and household activity are required or reintroduced to combat the virus. As our focus remains on the protection of the public from the virus, we must ensure that as much economic activity remains open (and viable) to ensure that business can continue to operate and provide income and employment for people during this on-going (and difficult) period.