Scotland’s Wellbeing: The Impact of COVID-19 - Chapter 3: Economy, Fair Work & Business, Culture

Contents

Foreword

Summary

1. Introduction
2. Health
3. Economy, Fair Work and Business, Culture
4. Communities, Poverty, Human Rights
5. Children, Education
6. Environment, International
7. Unequal impacts across the National Outcomes

What COVID-19 may mean for Scotland’s Wellbeing in the Future

Economy, Fair Work & Business, Culture

Economic performance

The latest monthly GDP data[i] shows that the Scottish economy declined in March to April but subsequently grew for five consecutive months to September, and over that period recovered around 68% of the output that had been lost during the unprecedented falls in March and April. However, like the UK as a whole, the pace of growth slowed notably in August and September compared to July.

Slower growth in September was evident in both the services and construction sectors, alongside a slight fall in output in the production sector, highlighting the gradual pace at which output will return to pre pandemic levels and potential for significant sectoral differences in recovery.

Overall, in September GDP remained 7.6% below the level it had been in February, however the scale of the impact, the subsequent pace at which demand has recovered and the need for local restrictions means that sectoral and regional differences are significant. 

Business activity data for Scotland (the Purchasing Managers Index) signalled that the slower growth continued into September, with the services sector in particular reporting only marginal growth, and then contracted in October and November.[ii]

International trade and exports

Falls in output also highlight the global challenges for international trade and investment. The value of Scotland's goods exports remain notably lower than last year and are anticipated to face ongoing challenges.

Comparing the second quarter of 2020 (April to June) with the same period in 2019, shows a significant negative impact of COVID-19 on Scotland’s trade. An overall decrease in goods exports of 31.1% was driven largely by a fall in oil and gas exports (down 52.4%) and a fall in the export of beverages (down 39.9%).

Business activity

Improvements in business turnover across most sectors in August reflected the further reopening of the economy over that period, although business turnover in both manufacturing and services remains lower compared to last year, emphasising the challenging position that many businesses are facing.

The fall in demand and turnover has resulted in businesses using a combination of cash reserves, cost cutting, government support and loans to accommodate their ongoing costs and maintain cash flow.

Cashflow and cash reserves remain a critical aspect of business viability, as firms continue to operate in an environment with ongoing restrictions on activity and subdued demand. Of businesses that had not permanently stopped trading in the second half of October, almost three in ten (28.6%) reported that they had cash reserves lasting for three months or less, and 15% reported a severe to moderate risk of insolvency.

This situation also presents ongoing risks to business investment going forward, which on the back of a downward trend over 2019, fell by 38.5% over the year to Quarter 2. Looking ahead, there are clear challenges for businesses as to how they adapt to the changing trading environment. Business optimism improved as restrictions eased, however many businesses expect to continue operating at reduced levels of capacity and with reduced staffing levels as the pandemic, public health measures and business support schemes evolve.

Consumer sentiment in Q3 was also at its lowest point in the quarterly time series, which is likely to have an impact on consumer spending in the final quarter of the year, particularly in the lead up to the festive season which is so important for the retail sector.  Retail sales remain significantly down on last year but have continued to stabilise in recent months.

The short term outlook for the final quarter of the year remains uncertain as cases have risen in Scotland, the rest of the UK and internationally. This has been reflected in weakening business and consumer optimism, presenting greater uncertainty for the medium term outlook.  Restriction in activity across various sectors of the economy in October, and following the levels approach in the Coronavirus (COVID-19): Strategic Framework in November and December will also have impacted on business activity.

Sectoral and regional impacts

In September, Scotland's business turnover index was 41.4 - up from 34.4 in August, but it remains significantly below its normal range of around 45 to 55.[iii] The results for September indicate that business turnover has increased for the fifth month in a row but remains significantly below pre-pandemic levels. Compared to August, most industries in the manufacturing and services sectors were continuing to expand, apart from the communications subsector.

More recent data from the Office for National Statistics (ONS) Business Impact of Coronavirus Survey, for 2 November to 29 November, showed that just under half of Scottish businesses reported lower turnover than normally expected for the time of year, and this was most pronounced in accommodation and food services (77.9% of businesses) and in arts, entertainment and recreation (75.7% of businesses).[iv]

The accommodation and food and the arts, entertainment and recreation sectors have been two of the hardest hit over the pandemic. In November these sectors had the largest proportion of businesses temporarily closed (38% in the accommodation and food sector and 11% in the arts, entertainment and recreation sector); the largest proportion of employees on furlough (49% and 40% respectively); and the largest proportion of businesses reporting that turnover had substantially decreased compared to the previous year.  Businesses in the accommodation and food sector were also most likely to report being at severe to moderate risk of insolvency.[v] 

Sectoral variation in business activity and output is also a key driver of geographical variation in impacts.  Areas with a high proportion of employment in hospitality and tourism, for example, have been particularly affected by the crisis, which has led several commentators to argue that rural and coastal areas look particularly exposed to economic risks. [vi]  While most of the jobs in the accommodation and food services sector in Scotland are in cities, cities also have more diversity of employment and so the declines in these sectors are not as notable in terms of overall employment in most urban areas. However cities have also been disproportionately affected by the closure of nonessential offices and their associated trade.

Combining data on output by sector during the pandemic with data on the sectoral composition of employment by area, analysis from Fraser of Allander shows which areas in Scotland are most vulnerable to employment loss. [vii] This suggests that a wide range of places right across Scotland are vulnerable to the employment impacts of the pandemic.

Analysis of claimant count data by local authority also presents a similar picture, with substantial increases across a broad range of council areas. There is some relationship to deprivation, with areas that are more deprived (with a higher claimant count rate) in general showing higher rates of increase.  However some council areas have also seen large rises despite below average claimant count rates, such as Edinburgh city and Aberdeen city.

A key factor in the speed with which different areas can recover is the level of available job vacancies. Fraser of Allander analysis shows that rural local authorities in Scotland experienced a smaller decline in the number of vacancies over the lockdown period and have now recovered above pre-lockdown levels. Cities, meanwhile, lost more vacancies at the height of lockdown and have been recovering more slowly.[viii]

Evidence from local authorities in Scotland shows similar findings. In terms of retail and recreation activity, urban local authorities have shown slower returns to baseline compared to rural and semi-rural authorities. Similarly, urban local authorities, as well as councils with the lowest levels of deprivation, remain significantly further from the baseline for workplace activity than do rural or deprived local authorities.[ix]  Differences between areas are likely to be further exacerbated over the forthcoming months by the economic impacts of local restrictions. This may be influenced by the sectoral profile of the areas under restriction or the dependencies these areas have with other regions under restrictions.

Public finances

COVID-19 and the response to it has had a deep and complex impact on both UK and Scottish public finances.  At the UK level, tax revenues have fallen as a consequence of the contraction of economic activity as well as through the granting of new reliefs and payment holidays (e.g. for VAT). UK government tax and national insurance receipts (combined) in the seven months to October 2020 fell by £38.3 billion (or 9.7%) compared with the same period in 2019.

At the same time, UK Government spending has also risen, again in part as a consequence of the economic contraction and associated rising benefit claims, but also because of additional spending on the NHS and the creation of new UK-wide employment support schemes. UK Government support for individuals and businesses during the pandemic contributed to an increase of £123.5 billion (or 28.5%) in UK Government day-to-day (or current) spending. This has also generated significant additional income for the Scottish Budget through consequentials on devolved expenditure.

The extra funding required to support coronavirus support schemes combined with reduced cash receipts and a fall in GDP have all helped push public sector net debt as a ratio of GDP to levels last seen in the early 1960s. Public sector net debt (excluding public sector banks) at the end of October 2020 was equivalent to 100.8% of GDP. This will have implications for UK Government fiscal headroom going forward and could impact on the availability of future funding for public services.

Scotland’s funding position is fundamentally dependent on the UK fiscal stance, as the Scottish budget receives a population share of UK spending, social security and tax decisions through the Barnett formula.  For devolved taxes, the operation of the Fiscal Framework means that the impact will depend on Scotland’s relative economic performance compared to rest of the UK.[x]  If Scotland’s economy is less resilient to the economic impact of COVID-19, and its tax revenues fall proportionately more, this would have a negative fiscal impact on the Scottish public finances, with implications both for direct employment in the public sector, as well as services delivered by the public sector.

Labour market

Overall impact

The impact of the pandemic on Scotland's labour market is only starting to emerge, with government support schemes so far preventing a substantial rise in unemployment.  At the end of August, 242,600 employees in Scotland were on furlough, helping the unemployment rate remain low, at 4.2% in August to October. [xi]  However, the claimant count – which can give a more timely picture (in terms of how quickly data becomes available) of those potentially affected by unemployment – reached 7.5% in November 2020[xii], more than double the number of people claiming in October 2019.[xiii] Payrolled employments were around 74,000 lower than in October 2019.[xiv] These figures emphasise the underlying challenges emerging in the labour market.

There has also been a sharp reduction in hours worked. In August these were down 6.7 million hours compared to a year ago, which represented the lowest weekly hours worked since 2013.[xv] This is partly driven by people on furlough who are recorded as employed but working no hours, and in July-September data there was an increase seen in hours worked. Labour market uncertainty was also reflected in a UK-wide survey in September, which reported that over a quarter (28%) of respondents still in work were either worried about redundancies or had been told that a redundancy process would occur.[xvi]

The Scottish Government’s future projections for unemployment published in September suggest that, in the central scenario, unemployment could peak at 8.2% in Q4 of 2020[xvii] and remain elevated for several years, only falling back to pre-pandemic levels towards the end of the scenario horizon in 2025.[xviii]  The Bank of England forecast (in early November) predicted that the unemployment rate (UK-wide) would peak at around 7.75% in Q2 of 2021, with the extended furlough scheme mitigating the impact of weak economic activity on the unemployment rate.

Unequal labour market impacts

The labour market shock has been highly concentrated in those sectors that were most impacted by the lockdown and subsequent restrictions, resulting in unequal impacts on workers.  Workers in these sectors are more likely than those elsewhere to be young, women and low-paid.  The accommodation and food services sector, for example, has the lowest hourly pay of all industry sectors in Scotland and among the lowest number of weekly hours. [xix]

It has been estimated that employees in the lowest earnings group are seven times more likely than those in the top 10% of earners to work in a sector that was shut down during the pandemic, and women around a third more likely to do so than men.[xx]  Single mothers with low qualifications are particularly concentrated in these sectors. [xxi] Some ethnic minority groups, for example, Pakistanis and Bangladeshis, are also concentrated in some of the hardest hit sectors, such as the passenger transport and food and beverage sectors, while migrant workers are also more likely to work in the hospitality sector. [xxii]  People in low-paid jobs are also less likely to be able to work from home since their jobs are typically customer-facing or based on business premises (e.g. sales and customer service occupations),[xxiii] which puts them more at risk of job loss or being placed on furlough. Young people are also more likely than other workers to be in precarious forms of work (e.g. zero hours contracts) which have been more susceptible to job losses.

A range of (UK-wide) survey data suggests that employees from minority ethnic groups are also more likely than other workers to have found themselves out of work as a result of the crisis.[xxvii]  There is also some evidence that disabled people may have been more likely to face redundancy during the crisis.[xxviii].

Self-employed people have also seen disproportionate negative employment impacts.  The number of people in self-employment fell at a record quarterly rate in the three months to June, UK-wide. [xxix]

The full labour market effects of the crisis have not yet been seen but the future impacts as it plays out are also likely to be unequal.  Some signs of this can be seen from analysis of what has happened to workers who were furloughed.  A (UK-wide) survey from September, found that the likelihood of a previously furloughed worker not being in work was higher for those working in hospitality, for younger workers, for those previously in insecure work and for minority ethnic workers.  Over a fifth (22%) of UK minority ethnic workers who were furloughed were no longer working in September, more than double the overall rate.[xxx]  Early analysis of the furlough scheme from HMRC also suggests that while an equal share of men and women in Scotland took up furlough, men have been more likely to be retained by their employers than women.[xxxi]

Concern has also been expressed that women may find it more difficult to secure alternative employment and income streams following lay-off, due to their disproportionate share of caring responsibilities. [xxxii] This risks widening gender disparities in pay and work over the longer term, particularly for lone parents. [xxxiii]

Evidence suggests younger workers will also continue to feel the worst employment impacts of the crisis – survey evidence suggests only a third of 18-24 year olds whose job had ended were back in work by September, lower than for other age groups, on top of their being more likely to lose their job in the first place.[xxxiv] It is also known that entering the labour market during a recession can lead to longer lasting scarring effects. It has been estimated that the current crisis could reduce the chances of being in employment for lower-skilled young adults leaving education this year by more than a third after three years.[xxxv]

Older workers may also fare less well.  It is known that older workers who become unemployed experience more long term unemployment than younger people – which has well established adverse effects on health and wellbeing, as well as being a major driver of poverty – and that older workers are also less likely to participate in upskilling.[xxxvii]  Survey data show that both the youngest employees and those aged 55 and older were the least likely to be working from home during the crisis, and least likely to expect to do so in the future.

Those groups that have suffered adverse health or social consequences from this crisis may also face employment limitations in the future. Evidence suggests that disabled people, for example, have faced a greater impact on their lives from COVID-19 (e.g. impacts on wellbeing and mental health), which could have implications for their future employment prospects.[xxxviii]

Culture

Cultural participation and attendance is an important source of wellbeing and Scotland’s cultural and creative industries make an important economic contribution. COVID-19 has had a substantial impact on Scotland’s cultural life. Measures to reduce exposure to COVID-19 have included limits on large gatherings, closure of venues, and cancellation of productions or programmes and large scale cultural events such as Edinburgh’s festivals.

This has had a dramatic effect on how people attend and participate in culture, although access and ability to participate changed over the year as some elements of the cultural sector reopened in mid-July and some remain open. [xxxix] A survey by Creative Scotland in August 2020 found that, while 96% of respondents said they had engaged in some activity at home during lockdown, over half indicated that they had missed the opportunity to go to cultural events and venues, with around one third participating in “substitute” online cultural activities.[xl]

COVID-19 may also have a bearing on the speed with which audiences return following relaxation of restrictions. When asked in August, around a third of respondents indicated they were comfortable attending cultural events in the near future, but the majority of people remained wary, mainly due to the desire to avoid crowds and be able to maintain social distance.[xli]  As a consequence, audience attitudes may be influenced by wider factors, such as uptake of vaccines, as well as restrictions on activities.  

Prior to COVID-19, attendance at cultural events or enjoyment of cultural activity was disproportionately low among adults in areas of deprivation and older age groups, with less cultural participation among adults living in the most deprived areas and among economically disadvantaged groups compared with the population as a whole.[xlii] It is unclear at present whether COVID-19 has accentuated these issues, however there is a risk of it having done so.

COVID-19 has had a substantial effect on the cultural sector. Performing arts venues closed for performances with a live audience in March 2020 and many remain closed. Performing arts venues and organisations make a large proportion of their income from ticket and associated sales, which largely ceased in March. Additionally, many were required to issue refunds for cancelled performances. Some organisations have presented performances and participation events through digital channels but these are often provided free of charge or have generated only small amounts of income.

The impact of COVID-19 on the cultural sector has continued to be significant.  Between 16-29 November, around 89% of Arts, Entertainment and Recreation businesses were estimated to be trading, up from just over 40% in June.  Around 76% reported reduced turnover during November, compared with normal expectations for the time of year. Around 24% also reported having no or less than 3 months of cashflow.[xliii] Footfall is lower than normal among businesses and cultural sites that are open. The Moffat Centre reported that footfall at a range of visitor attractions in October was substantially below levels seen in 2019 across Scotland.[xliv]

The workforce in the cultural and creative industries sector has also been substantially impacted by COVID-19.  Around 40% of the workforce in the Arts, Entertainment and Recreation sector was estimated to be on furlough between 2 and 29 November, including around 13% of the workforce on full furlough leave.[xlv] Historically, the cultural sector has been characterised by low income, low wealth and economic uncertainty, with a high rate of freelancing in the creative industries. In 2016, 41 percent of 1,500 arts practitioners surveyed in Scotland were freelance with a median income of £20,000.[xlvi][xlvii]

Longer term expectations for the culture sector

The business model of much of the cultural sector is severely impacted by the pandemic, particularly with substantial restrictions on live performances, and capacity restrictions in cultural venues including museums and galleries. The speed of return to pre-pandemic levels of attendance and participation in live events, and associated economic activity will be substantially influenced by measures to control COVID-19, but also by audience confidence about returning. This will also have implications for the outlook for associated sectors, including the tourism sector (including accommodation and hospitality) and events businesses. It may also have implications for equity of attendance at and participation in cultural activities, with the potential to increase inequality.

[i] https://www.gov.scot/collections/monthly-economic-briefs/

[ii] https://www.gov.scot/publications/monthly-economic-brief-october-2020/pages/1/

[iii] https://www.gov.scot/publications/monthly-business-turnover-index-september-2020/

[iv] https://www.gov.scot/publications/bics-weighted-scotland-estimates-data-to-wave-18/

[v] https://www.gov.scot/publications/bics-weighted-scotland-estimates-data-to-wave-18/

[vi] https://www.ifs.org.uk/inequality/geographical-inequalities-in-the-uk/ and https://www.jrf.org.uk/blog/targeted-action-parts-britain-risk-surging-unemployment

[vii] https://fraserofallander.org/covid/mapping-local-job-vulnerability/

[viii] https://fraserofallander.org/scottish-economy/latest-data-on-the-scottish-economy-update-9th-october-2020/

[ix] Improvement Service

[x] The Scottish Government’s Medium-Term Financial Strategy to be published in Jan 2021 will set out the impact of the pandemic on Scotland’s public finances in more detail.

[xi]https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/regionallabourmarket/december2020. Table 1. Summary of latest headline estimates for regions of the UK, seasonally adjusted, August to October 2020

[xii] Claimants as a proportion of economically active residents aged 16+. https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/outofworkbenefits/timeseries/dpau/unem

[xiii] Not all of this increase is a result of increased unemployment. Eligibility criteria for benefits has been widened, and some new claimants may still be working but have experienced a fall in income and therefore become eligible to claim benefits.

[xiv]https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/datasets/realtimeinformationstatisticsreferencetableseasonallyadjusted

[xv] https://fraserofallander.org/scottish-economy/what-does-the-latest-labour-market-data-tell-us/

[xvi] https://www.resolutionfoundation.org/publications/jobs-jobs-jobs/

[xvii] Though this was based on the less generous Job Support Scheme, rather than the furlough scheme, being in place.

[xviii] https://www.gov.scot/publications/state-economy/

[xix] https://fraserofallander.org/scottish-economy/labour-market/workers-in-the-tourism-and-hospitality-sector-who-are-they-and-what-support-may-then-need-in-the-future/

[xx] https://www.ifs.org.uk/uploads/Covid-19-and-inequalities-IFS.pdf

[xxi] https://www.ifs.org.uk/uploads/Covid-19-and-inequalities-IFS.pdf

[xxii] https://www.ippr.org/blog/migrant-workers-and-coronavirus

[xxiii] https://www.ifs.org.uk/uploads/Covid-19-and-inequalities-IFS.pdf

[xxiv] Poverty and Coronavirus in Edinburgh, Edinburgh Poverty Commission, May 2020

[xxv] Poverty and Coronavirus in Edinburgh, Edinburgh Poverty Commission, May 2020

[xxvi] UK Youth https://www.ukyouth.org/wp-content/uploads/2020/04/UK-Youth-Covid-19-Impact-Report-External-Final-08.04.20.pdf

[xxvii] https://www.ippr.org/blog/minority-ethnic-groups-face-greater-problem-debt-risk-since-covid-19;

[xxviii]https://www.citizensadvice.org.uk/Global/CitizensAdvice/Work%20Publications/An%20unequal%20crisis%20-%20final%20(1).pdf

[xxix] https://fraserofallander.org/scottish-economy/a-review-of-todays-labour-market-data/

[xxx] https://www.resolutionfoundation.org/publications/jobs-jobs-jobs/

[xxxi] https://www.gov.scot/publications/monthly-economic-brief-october-2020/

[xxxii] https://www.oecd.org/coronavirus/policy-responses/women-at-the-core-of-the-fight-against-covid-19-crisis-553a8269/

[xxxiii] https://www.gov.scot/publications/monthly-economic-brief-october-2020/

[xxxiv] https://www.resolutionfoundation.org/publications/jobs-jobs-jobs/

[xxxv] https://www.resolutionfoundation.org/app/uploads/2020/05/Class-of-2020.pdf

[xxxvi] Young People’s Response to Medium Term Covid-19 Recovery, Young Scot May 2020

[xxxvii] https://www.nesta.org.uk/blog/risk-older-workers-face-wake-covid-19/

[xxxviii] https://www.gov.scot/publications/monthly-economic-brief-october-2020/

[xxxix] https://www.coronavirusandtheeconomy.com/question/what-do-we-know-about-impact-coronavirus-creative-industries

[xl] https://www.creativescotland.com/resources/professional-resources/research/creative-scotland-research/covid-19-audiences

[xli] https://www.creativescotland.com/resources/professional-resources/research/creative-scotland-research/covid-19-audiences

[xlii] https://www.gov.scot/publications/2019-scottish-household-survey-culture-heritage-report/pages/6/

[xliii] BICS weighted Scotland estimates: data to wave 18 - gov.scot (www.gov.scot)

[xliv] Moffat Centre, Glasgow Caledonian University (2020), Visitor Attraction Barometer, October 2020.

[xlv] BICS weighted Scotland estimates: data to wave 18 - gov.scot (www.gov.scot)

[xlvi] https://www.creativescotland.com/resources/professional-resources/research/creative-scotland-research/understanding-diversity-in-the-arts

[xlvii] https://www.gov.scot/publications/towards-robust-resilient-wellbeing-economy-scotland-report-advisory-group-economic-recovery/