Some good news – kind of. The Royal Bank of Scotland’s latest Purchasing Managers’ Index report suggests things are starting to get built and sold again. A PMI rate above 50 suggests activity is expanding rather than contracting, and Scotland’s August PMI was 55.8, ahead of Northern Ireland and Wales but behind all English regions. Manufacturing, in particular, seems to be picking up, with producers reporting increases in output and order book volume. Still, Services remains sluggish, and remember almost 80 per cent of Scotland’s economy is in Services, so don’t get too excited. While the decline in employment was the slowest since February, the trajectory was still downwards.
And this is the calm before the storm. When one thinks about the consequences of the furlough scheme coming to an end as November begins, the mind boggles. Nearly three-quarters of a million Scots have been furloughed (736,500 by the end of June, when the scheme closed for new entrants). That’s nearly one-third of the entire workforce (30 per cent). Not every one of them will be laid off, but we can pretty confident that even in the best scenarios where covid-19 is contained (things don’t look promising on that score right now), the impact on businesses from falling consumer demand will generate significant unemployment.
Over 95 per cent of firms in Scotland have started trading again since lockdown, but nearly 75 per cent of these say turnover is down, with over 10 per cent saying it’s down by more than half. The problem for most firms now is not being operational, it’s that fewer people want to buy what they’re selling.
Remember, companies don’t just need cash flow to be profitable, they need it to pay costs, including debts. A University of Edinburgh study has looked at the 2019 accounts of 5,000 hospitality & tourism firms, and found 28 per cent will default under a ‘mild stress’ scenario. Under a more severe scenario, 43 per cent would default. UK corporate debt is 70 per cent higher than the 2011 figure. A lot of companies will be on the verge of bankruptcy right now.
Companies which go bankrupt lay their staff off, which then pushes those individuals into personal debt problems of their own. 325,000 Scots have taken a ‘payment holiday’, but that ends on the same day as the furlough scheme. That debt will have accumulated in that time. Six in ten of those on payment holidays say they are already in financial difficulties and will struggle to pay the debt when the ‘holiday’ ends, while 46 per cent don’t have any savings.Scotland, as a highly financialised economy, is a corporate and personal debt pyramid which requires constant servicing to avoid it from toppling over.
And while wages have declined for every month since April, living costs have not fallen. Private sector rents were 3.1 per cent higher in August this year than last year. BT has just announced a new rate of inflation plus an extra 3.9 per cent on top. Food prices are around 1.5 per cent higher than last year. Welfare support has not made up the difference. Universal Credit was increased by £20 per week, but UK Ministers plan to cut that next year. The Scottish Government’s Scottish Child Payment has been delayed until February, much to the chagrin of anti-poverty campaigners. When reduced incomes meet debts which haven’t fallen in value and living costs which have increased in value, something has to give. Seven in ten Scots’ on Universal Credit have already cut back spending on essentials since the crisis began.
A financial storm is brewing, and as always it’s those with least who will suffer the torrential rain and the flooding. However, you will have to be very fortunate indeed to avoid getting soaked by what is to come.
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