This month's economic brief provides an update on the Scottish economy on the final quarter of 2021. Covid related restrictions on economic activity remain relatively low, particularly compared to last winter, but the emergence of the Omicron variant has increased the uncertainty around both the economic and health outlook, both domestically and globally, and has led to a tightening of public health restrictions and messaging and represents a downside risk to the economy.
At the same time, the economy has seen a build-up in inflationary pressures over the latter half of the year, with inflation reaching 5.1% in November, the highest level in over a decade. This is expected to continue into 2022, with the Bank of England and other forecasters expecting inflation to peak at 6% in the first half of 2022.
The latest data for October show Scotland's GDP grew 0.2% over the month, following falls in July and August. Services output continued to grow, with growth spread across 8 of the 14 subsectors. This was supported by growth in production, driven by fluctuations in energy sector output, with the manufacturing sector seeing output fall. Construction sector output also fell, reversing the gains in the previous month.
The end of September saw the end of the furlough scheme, which had provided essential support to the labour market for over 18 months. The phased nature of the withdrawal, combined with the strength of the reopening economy, has meant that there has been little evidence of an increase in unemployment. The headline unemployment rate fell to 4.1% in August to October while the number of payrolled employees increased in both October and November, and is now almost 16,000 higher than pre-pandemic levels.
Challenges of shortages in the labour market remain however, with demand for both permanent and temporary staff remaining strong in November while the availability of staff has continued to fall, generating further upward pressure on starting wages. These wage pressures are also accompanied by businesses facing increased input costs more generally, which are also rising at record rates as supply chain pressures continue.
Looking ahead, although the Omicron variant has increased uncertainty for the economic outlook, demand remained robust toward the end of the year, with new work increasing at a strong pace in November. However, supply chain cost pressures and rising labour costs for businesses are increasingly being passed on to customers. As such, despite the labour market remaining strong, households are concerned about the outlook for their personal finances, with inflationary pressures increasing. With consumers becoming more cautious again, some businesses may see demand begin to weaken, and risks to the recovery are more elevated than they have been for some time.
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