This month’s economic brief provides an update on data up to the end of August. The impacts of the easing of restrictions, and the move to level zero that came into effect in Scotland on 19 July, are beginning to be seen in the leading indicators, although it is still too soon for the impact to be seen in GDP.
The latest GDP data for June show further growth in Scotland, for a fifth consecutive month, with overall GDP growth of 0.9% over the month. For the third month in a row, the strongest contribution to growth was from accommodation and food services while there was further growth from non-food retail which continued to benefit from the easing of restrictions.
Overall, Scotland’s GDP is now 2.1% below its pre-pandemic level in February 2020 and is at its highest level since the start of the pandemic. The recent strong growth in consumer facing sectors has supported this recovery, although sectors such as accommodation and food and arts, culture and recreation remain furthest below their pre-pandemic levels of output.
Business surveys for July and into the start of August continue to signal recovery continuing, though at a more stable and moderate pace than the sharp pick up we saw at the end of the first quarter of 2021 as the Stay at Home order was lifted. Despite the continuing recovery, businesses are increasingly reporting specific challenges including supply chain and staff shortages, and this is reflected in upward price pressure for both goods and staff. The Bank of England and other forecasters have increased their forecast for inflation, which is now expected to reach 4% at the end of this year. This increase is still expected to be temporary, as demand increases stabilize and supply chains recover as restrictions ease. However, the upward revisions to inflation forecasts highlight the risk that inflation could be more persistent, particularly if pressure on wages and input costs begin to be passed further down the supply chain, or if supply constraints, such as those seen in the transportation industry, persist.
As the economy has reopened, there has been a fall in retail sales, particularly in food stores, as activity has returned to hospitality industry as restrictions have eased. Despite the fall in retail sales in July, they remain higher than pre-pandemic levels, but this continues to be driven by higher online sales, with visits to retail and recreation still on average 6% below pre-pandemic levels. Household savings remain elevated, suggesting that consumers remain cautious about spending.
As we enter the final month of the furlough scheme, labour market indicators continue to improve, with the number of jobs on furlough falling at its fastest rate since May. In July, while both indicators remained weaker than their pre-pandemic levels, the number of payrolled employees in Scotland rose to its highest level since March 2020 while the claimant count has continued to fall to its lowest level over the same period. The latest UK data also show increased growth in payrolled employees aged 18-24 in July, as employment in accommodation and food services increased.
Looking ahead, the outlook remains uncertain, as Covid-19 cases have increased again following the further easing of restrictions in August. There continue to be risks to recovery, particularly as fiscal support comes to an end, with the ending of the furlough scheme, the temporary changes to Universal Credit, and the 5% VAT rate for hospitality at the end of September. Overall, however, business and consumer sentiment remains positive about the outlook for the economy.