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Scottish Government Monthly Economic Brief - August 2021

1st September 2021

The monthly economic brief provides a summary of latest key economic statistics, forecasts and analysis on the Scottish economy.

Consumption
Consumer sentiment continues to strengthen and is positive for the second consecutive month.

Consumer sentiment
Consumer sentiment in Scotland has continued to strenghten, building on the improving attitudes since the start of the year with the Scottish Consumer Sentiment Indicator rising to 6.7 in July, notably improved from the series low levels of sentiment in the second half of 2020.

The general improvement in sentiment is the result of several factors. Firstly, while consumers continue to think that current circumstances regarding the economy and financial security are worse than they were in the previous year, consumers in balance are less negative than in June. Attitude towards spending has improved significantly and is the only current view indicator to have returned to positive territory.

Secondly, looking ahead to the next 12 months, respondents expect the economy and their household finances to improve over the coming year (relative to the current situation), and while the finances expectations indicator eased back in July, taken together, expectations for the outlook have improved.[18]

Sentiment indicators continue to be highly sensitive to the rapidly moving developments on the pandemic and the unprecedented economic impacts that we have seen over the past 16 months. As such, they will be a key indicator in understanding the level to which a recovery in consumer sentiment feeds through to changes in consumption over the course of the year.

Retail sales and visits to retail hubs
In July, retail sales in Great Britain fell 2.5% on June however they were up by 5.2% in the three months to July compared with the previous three months and are 5.8% higher than their pre-pandemic level. [19]

Food store sales fell 1.5% in July following a boost supported by the Euros in previous months. Likewise non-food sales fell 4.4% driven by falls in second-hand goods stores and computers and telecoms equipment.

However on a monthly basis the proportion of retail sales online increased to 27.9% in July from 27.1% in June and remains substantially higher than the proportion of online retail spending in February 2020. This is the first monthly increase in online retail sales since restrictions eased.

Google mobility data for Scotland show visits to retail picked up sharply in April and May as restrictions eased having been over 60% below the pre-pandemic level at the start of the year. The pace of recovery was then more moderate over June and July and on average remained around 6% below pre-pandemic levels.
In the first half of August retail visits increased, on average, to around 3% above baseline pre-pandemic levels. This is the first time since March 2020 that visits have been above the baseline.
Line chart showing levels of movement across location types in Scotland between March 2020 and August 2021.

The pick-up in the number of visits to retail may be linked to movements that can be seen across the other indicators. For example, movement in transport has also increased in to at 17% below its pre-pandemic level in the first half of August while visits to workplaces are 30% below pre-pandemic levels in August (though the fall from June will in part reflect the start of school holidays).

Household Savings and Consumer Credit
At an aggregate level, household disposable income continued to rise into the first quarter of 2021 with incomes supported by the furlough scheme while household expenditure fell reflecting the lockdown restrictions in place over the period. This has not been the case across the whole economy, with lower income households facing more significant financial challenges.

The savings ratio rose over the quarter to 20% though remains lower than the peak at the start of the pandemic.

Bank of England data show that at an aggregate level, net flows from households into deposit-like accounts was £7.1 billion in in July, down from an average of £8.8 billion between April and June 2021. This remains relatively high compared to pre-pandemic levels when the average net inflow in the year to February 2020 was £4.7 billion. However, has fallen from periods of more elevated inflows over the past seventeen months

On aggregate in July, consumers borrowed no additional credit, with an additional £0.1 billion of ‘other' forms of consumer credit such as car dealership finance and personal loans, offset by net credit card repayments of £0.1 billion. This level of borrowing remains significantly lower than the pre-pandemic monthly average of £1.2 billion in the two years to February 2020.

Overall, the latest data shows the pace of household savings has slowed relative to the start of the year. Net borrowing marginally increased between March and June, however has since tapered off. The extent to which households subsequently spend accumulated savings and further increase borrowing as restrictions ease remains uncertain. As the outlook improves, latest survey data show an increasing share of people planning to spend a proportion of their additional savings.[21]

Interest rate and inflation
UK CPI inflation was 2% in July, down from 2.5% in June, while the inflation rate in the US is 5.4% in the Eurozone is 2.2%.

UK inflation has risen sharply as the economy has reopened in recent months reflecting a global rise in input cost pressures (raw materials) which are being passed through to consumer goods, base effects from price falls at the start of the pandemic (e.g. in energy), and an increase in business activity and demand as restrictions have eased.

The fall in July in part reflects price falls in clothing and footwear during the summer sales and other recreational goods which offset a further rise in transport prices, driven by the rise in second hand car prices and charges for maintenance and repair.
The CPI rate is currently at the Bank of England's 2% inflation target. At their August meeting, the Monetary Policy Committee (MPC) made no change to monetary policy, maintaining the Bank Rate at 0.1% and the current programme of Quantitative Easing.[22]

The Bank of England forecast inflation to rise to 4% in Q4 2021 before falling back to the target 2% in late 2023 and consider the above target levels of inflation to be temporary and as a result of the economy rebalancing after the pandemic. However, uncertainties exist with the forecast around the persistence of demand and wage pressures and commodity pricing.

On the supply side, input cost pressures (e.g. raw materials) have risen sharply over the past year, although to date this has only been partially passed on to sale prices. In the period 26 July to 8 August, 23% of businesses reported an increase in materials, goods or services bought by the business while 7% of businesses reported an increase in the prices of goods or services sold by the business.[23]

There are large sectoral differences and some sectors are more affected by the increase in input costs. In the period 26 July to 8 August, 66% of construction businesses reported an increase in input costs while this was the case for 40% of manufacturing, 27% of wholesale, retail and repair of vehicles, and 17% of accommodation and food service businesses.

Producer input price inflation was 9.9% in July while output price inflation was 4.9%; both having increased compared to June.[24]
Line chart showing the annual change in UK producer input prices and output prices between January 2015 and July 2021.

Wider PMI business survey evidence points to supply chain pressures intensifying in recent months and contributing to this in both the manufacturing and construction sectors, with firms facing material shortages and increased levels of purchases and stocking, while supplier delivery times have deteriorated.

GDP growth outlook
Optimism for the economic outlook this year has continued to strengthen.

As a result of the successful rollout of the vaccination programme, and the corresponding easing in public health restrictions, the Scottish Fiscal Commission (SFC)[25] have upgraded their economic outlook for Scotland. They now expect that the Scottish economy will grow by 6.7% in 2021, and return to pre-pandemic levels by April to June 2022, almost two years sooner than forecast in January.

In line with other forecasters, the SFC have also revised down their forecast of unemployment. They still expect unemployment to increase as the furlough scheme unwinds, but to now peak at 5.4%, much lower than the previous forecast peak of 7.6%.

The Fraser of Allander Institute forecast, from June, is for GDP to grow by 5.9% in 2021. Overall, GDP is forecast to return to pre-pandemic levels by July 2022, a quarter earlier than had previously been forecast.[26]

At a UK level, the IMF forecast UK GDP to grow 7% in 2021 (revised up from 5.3% in April). This is broadly in line with the Bank of England's May forecast[27] of 7.25% and the latest average of new independent UK forecasts[28] published by HM Treasury which points to UK GDP growth of 7.1% in 2021. Reflecting the general improvement in optimism for the outlook, supported by stronger than expected activity in the first half of the year, the delivery of the vaccination programme and easing of restrictions, the average new forecast for 2021 has risen each month since February and is up 0.3 percentage points from the average new forecast in June.
Bar chart showing average UK GDP growth forecast for 2021 by month of forecast creation.

At a global level, the IMF's latest forecast from July projects world GDP to grow 6% in 2021 following the fall of 3.2% in 2020.[29] At an aggregate level, this remains unchanged from their previous forecast in April, however reflects an upward revision to their growth forecasts for Advanced Economies (up 0.5 percentage points to 5.6%) and a downward revision to their forecast for Emerging Market and Developing Economies (down 0.4 percentage points to 6.7%) with the IMF highlighting that differences in vaccine access and policy support have contributed to greater divergences in the expected pace of recovery across countries.

Read the report with more graphs at https://www.gov.scot/publications/monthly-economic-brief-august-2021/