This edition of the State of the Economy provides an overview of economic activity in Scotland during the third quarter of 2021, at a new point of the pandemic in which restrictions on economic activity have largely been lifted and intensifying global supply chain and inflationary headwinds have emerged as key features of this stage of the recovery. This is at the same time as fiscal support has begun to be withdrawn, with the end of the furlough scheme and the temporary changes to VAT and Universal Credit.
Scotland's GDP continued to edge back towards its pre-pandemic level in August and is now 1.3% below, having fallen over 20% at the start of the pandemic. The pace of growth has generally slowed over July and August reflecting that the boost in output from restrictions easing on consumer facing services over the second quarter has moderated and supply chain disruption has been impacting on activity in construction and manufacturing in particular.
Labour market conditions are also continuing to improve with the number of payrolled employees rising back above pre-pandemic levels for the first time, having fallen almost 4% during 2020. However, uncertainty has increased slightly in recent months as labour shortages in some sectors continue to emerge while the end of the furlough scheme presents a key step change in the support being provided to employment and incomes. 80,000 jobs in Scotland were still on the furlough scheme when it ended in September and while it is too early to see impacts in the official unemployment figures, emerging survey data suggests many furloughed workers have returned to work which should contribute to economic scarring being lower than initially feared.
Trading conditions remain challenging for businesses at this stage of the pandemic as supply chain disruption and inflationary pressures on input costs have intensified and present new cashflow challenges for many businesses. Part of this reflects bottlenecks in supply chains and material shortages, while the sharp rise in energy costs and some upward pressure on wage costs are also impacting.
The latest data indicate that businesses are partly absorbing some of the higher costs, however costs are also passing through to consumers and could see inflation rise towards 5% in the coming months. This is largely expected to be temporary as the economy continues to rebalance, however will create new pressures on households budget and spending power.
Looking ahead, levels of business and consumer sentiment remain positive and have significantly improved on last year, however have softened slightly recently as new challenges have emerged. Current forecasts expect Scotland's GDP to return to pre-pandemic levels in the first half of 2022.