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Economic commentary

Economic commentary

Our monthly update on global, UK and Scottish economic trends and performance, drawn from a wide range of economic indicators and commentaries. Published June 2021.

Summary

Economic recovery from the pandemic is being dictated by the level of restrictions present in each country, with the U.S. and China outperforming other major economies in the first quarter of 2021.

The UK economy declined in the first quarter, but a strong rebound in business activity is now underway.

Scotland’s economy is also beginning to grow as restrictions ease, but ongoing use of the furlough scheme makes the extent of recovery in the labour market difficult to measure.

Scottish businesses are expressing cautious optimism as the country exits lockdown.

However, many report ongoing uncertainty as a result of the return to the tier system of restrictions, as well as an inability to plan tied to uncertainty around the pace and level at which demand will return.

The UK’s departure from the EU also continues to be a major issue for Scottish businesses trading with Europe – challenges around paperwork and additional costs have generally not eased.

Prospects for the global economy have improved considerably but the outlook varies across regions depending on vaccine progress.

The latest forecast for the UK economy is for robust growth in 2021 as restrictions ease, and a smaller increase in unemployment than previously anticipated.

Possible headwinds facing Scottish businesses in the near term include rising costs and competition for staff – while a strong rebound in global trade and a new incentive for business investment offer opportunities to accelerate recovery.

Recent economic data

Global/UK

Economic performance in the first quarter of 2021 reflected the pace at which countries reopened their economies.

In the UK, a modest contraction masked renewed momentum during the quarter as lockdown measures started to ease.

Business surveys suggest a broad-based UK recovery is now underway, with all regions reporting notable increases in business activity in April.

Exports to Europe have experienced a period of disruption and volatility but it remains too early to determine the lasting impact of the UK’s departure from the EU.

Scotland

The latest monthly GDP data suggest the Scottish economy is growing again after declining during the latest lockdown.

As restrictions ease, the share of Scottish businesses trading has approached a level similar to late Summer 2020.

Private sector activity in Scotland expanded at a robust pace in April, despite underperforming most other areas of the UK.

The latest headline labour market data for Scotland suggest employers may be adding staff as they rebuild capacity.

This is consistent with a modest rebound in recent months in the number of payrolled employees.

The number of furloughed workers is yet to fall materially, but more recent survey data suggest it is likely to do so.

Current business sentiment

Feedback from Scottish Enterprise Customers: May 2021

Overall sentiment

Covid-19 remains the dominant challenge facing a majority of businesses.

Optimism for the future has improved considerably as a result of restrictions being eased and the continued success of the vaccine rollout.

However, many businesses cite ongoing uncertainty following a return to the tier system and the possibility of restrictions changing at short notice.

Businesses also report an inability to plan ahead - this reflects uncertainty around the pace and level at which demand will return.

Brexit continues to be a major issue for many businesses trading with the EU - challenges around paperwork and additional costs have generally not eased.

Some businesses impacted by Brexit continue to seek more long-term solutions, for example, setting up facilities in the EU.

Workforce

Some businesses are keeping a proportion of workers furloughed until demand picks up - others are retraining workers to perform multiple roles so they can reopen with fewer staff until demand levels become more clear.

Some employers are finding it difficult to offer staff guaranteed hours due to uncertainty around the trading environment.

Hospitality businesses are reporting staff shortages - some overseas staff returned home during the pandemic, while others who found employment in other sectors during lockdown are choosing to stay in those jobs.

Other businesses expect to lose staff as they reopen - some workers that would ordinarily have left by choice chose instead to remain on furlough throughout.

Many businesses report returning staff have concerns about potential loss of skills, so are holding back-to-work retraining sessions.

A few Scottish businesses (for example, in creative industries) report losing staff to London-based companies who are able to offer remote working paying London wages.

International and trade

Scottish businesses continue to report reluctance among EU customers to buy from the UK due to perceived barriers post-Brexit, for example, additional paperwork.

Some businesses are absorbing huge increases in freight/customs costs just to maintain their customer base - but acknowledge they will ultimately need to pass these on, risking future business.

Other businesses have simply stopped selling to the EU until shipping and other costs reduce.

Businesses continue to explore more permanent solutions e.g., applying to operate customs warehouses in the UK or establishing warehouse/distribution facilities in the EU.

Some businesses continue to report increased sales from markets where restrictions are easing faster, for example, in Asia Pacific.

Businesses have indicated that they may only have a presence at larger industry events in the future. The pandemic has shown they can engage/maintain customer relationships virtually, while reduced travel budgets for customers may further reduce the value of attending trade shows.

Cashflow

Some businesses believe social distancing measures, even as restrictions ease, continue to undermine their ability to trade profitably.

Many businesses have delayed debt repayments over the last year and accrued even greater levels of debt - and now fear repayment coming due before revenue fully recovers.

Many smaller businesses expect to operate with major debt for the foreseeable future and are unlikely to invest in their businesses for some time as a result.

Some businesses in the Glasgow service sector (for example, hotels, taxis, transport companies) have indicated their existence is reliant on COP26 going ahead as a physical event.

A few businesses report being in a better financial position than expected due to savings on travel and greater use of digital technology.

Tourism and hospitality

Industry performance since reopening in late April has been mixed.

Rural areas are seeing greater demand than cities - limited forward tourism booking in cities has been further exacerbated by a lack of business trade.

Tourism businesses are almost focusing exclusively on domestic customers - the lack of international visitors in 2021 is likely to disproportionately impact the visitor attractions sector.

Many tourism businesses are keen to avoid any appearance of price gouging while international breaks are not possible - but this is proving challenging as costs increase.

Tourism and hospitality businesses in Glasgow report widespread cancellations and food waste following the decision to keep the city in Level 3.

Forward look

Forecasts

The OECD has raised its forecast for global growth in 2021 as a result of effective vaccination programmes and strong government support in advanced economies, but warned of an uneven recovery that could worsen inequalities as emerging-market economies struggle with slower vaccine deployment.

The Bank of England's central forecast predicts the UK economy will grow at a record 7.25% in 2021, citing the success of the vaccine rollout and the expected impact of pent-up consumer spending.

UK unemployment is now expected to peak at around 5.5% in the third quarter as the furlough scheme ends, much lower than previously forecast, as demand for labour picks up.

Challenges and opportunities

Scottish businesses reported another steep increase in cost burdens in April, forcing many to consider charging higher prices during a time of economic uncertainty.

Demand for staff in Scotland has surged while candidate availability has fallen, fuelling concern among employers about potential hiring difficulties.

Global trade in goods rebounded to a record high in the first quarter of 2021, indicating global demand in key markets has recovered for well-positioned Scottish exports able to navigate ongoing trade disruption.

Evidence suggests a new tax break on UK business investment has the potential to encourage Scottish businesses to either bring forward future spending or make new capital outlays.

 

Access the full report with charts in PDF format at Scottish Enterprise Evaluations Online

Disclaimer

We release Scotland's economic commentary monthly. This commentary reflects our understanding of issues at the time of writing drawn from a wide range of credible and respected sources and should not be taken as Scottish Enterprise policy.

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