This edition of the Monthly Economic Brief provides an update on the Scottish economy during the final quarter of 2020 and into the start of the new year. The necessary tightening of restrictions over the period increasingly weighs on the short term outlook, although the roll out of the vaccination programme provides new scope for optimism further ahead.
Scotland’s GDP fell 1.4% in November (UK: -2.6%), having grown for six consecutive months following the sharp fall in March/April during the national lockdown when GDP fell by almost a quarter. The fall in output in November primarily reflects the tightening of restrictions during the month, with consumer facing parts of the service sector most directly impacted driving the fall.
Scotland’s GDP in November was 7.1% lower than its pre-pandemic level in February (UK: ‑8.5%) showing that significant progress in the recovery has been made from the national lockdown back to pre-pandemic levels of output. However, latest business surveys have signalled ongoing challenges with a fall in the proportion of firms trading, and a renewed increase in the proportion of the workforce that are furloughed. For some sectors, the start of the year has also seen some trade disruption and delays in the movement of goods following the end of the EU-exit transition phase. Despite this, the latest restrictions, both in the UK and internationally, appear to have had a smaller impact on the economy than had initially been expected, reflecting how businesses and consumers have adapted to living with restrictions, while business confidence also started to pick-up reflecting positive news about vaccine developments.
The pattern of growth in Scotland over 2020 has been broadly similar to the UK as a whole, with variations in the pace of growth across months reflecting differences in the sectoral makeup across the UK and the timing and duration of restrictions. However, the necessary tightening of restrictions at the end of the year, domestic and international, is expected to further slow the pace of recovery in the short term across the UK as a whole.
Reflecting these short term challenges, the Scottish Fiscal Commission (SFC) has forecast Scotland’s GDP to fall 5.2% in the first quarter of the year and for unemployment to rise to 7.6% in the second quarter when the furlough scheme ends in April. This highlights how critical the furlough scheme has been in supporting jobs and incomes at a time when output has fallen sharply and the risk of a sharp rise in unemployment when the scheme is ended. Furthermore, the longer term outlook remains extremely uncertain and will be strongly influenced by the roll out of the vaccination programme and the ongoing need for restrictions.
The SFC’s latest forecasts see a moderate recovery in 2021, reflecting an expectation that some form of restrictions remain in place over the course of the year. This strengthens to 7.5% in 2022, as restrictions are removed. Overall, output is not expected to return to pre-pandemic levels until the start of 2024. This not only highlights the extent of the recovery that still lies ahead, but also the importance of supporting businesses and jobs through this period to ensure businesses remain viable and the level of scarring from this economic crisis is minimised.
Looking back over 2020, we can see the importance of having a clear framework, moving early to suppress the virus and maintaining confidence of consumers and businesses. This has been important in signalling the Government’s decision making process, allowing business to plan, adjust and minimise uncertainty and the associated costs of concurrent opening and closing.
We have also seen innovation from business to continue trading albeit in difficult circumstances and a willingness to respond to requirements for change. Continuing this flexible approach, alongside a clear framework in order to reduce uncertainty as best we can, is crucial for the year ahead.