Sharp slowdown in growth predicted as impact of Brexit takes its toll: Fraser of Allander Institute


Sharp slowdown in growth predicted as impact of Brexit takes its toll, says Fraser of Allander Institute

  • Forecasts for Scottish GDP growth are revised down in each and every year of the forecast horizon – with forecast growth of just 0.9% in 2016, 0.5% in 2017, and 0.7% in 2018;
  • Downward revision to growth of -0.5%-point in 2016, 1.4%-point in 2017 and 1.3%-point in 2018 relative to our pre-referendum forecast;
  • Unemployment predicted to rise to 7% in 2017;
  • The combination of the sharp fall in the pound and the much anticipated monetary stimulus from the Bank of England mean that Scotland is likely to avoid a sustained recession with growth in each year of the forecast horizon. However, a short ‘technical recession’ – two consecutive quarters of falling output – is highly possible.

Growth in Scotland is forecast to slow markedly as a direct result of the EU referendum, according to a revised Economic Commentary from the University of Strathclyde’s Fraser of Allander Institute.

A prolonged period of economic uncertainty and financial volatility as the terms of ‘exit’ are negotiated is now unavoidable. This will carry risks for investment, household incomes and jobs.

Moreover, trade and investment prospects will be damaged by the decision to leave the EU, according to the report. As businesses and investors adjust, the Fraser expects growth to slow.

While the risks are on the downside, it is important to not over-state them. The Institute highlights that exiting the EU is materially different from the financial crisis of 2008 and 2009, where the global systemic effects of the crisis were much larger.

However, the costs of the UK leaving the EU on Scotland’s economy are likely to be structural and long-lasting, with any benefits at best still undetermined and highly uncertain. 

In the absence of a significant fiscal policy stimulus by the UK Government, Scottish growth is forecast to slow considerably through 2016, 2017 and 2018.

Growth is likely to be lower but remain positive on an annual basis. A short ‘technical recession’ within the next three years in Scotland – two consecutive quarters of falling output – is however, highly possible.

Professor Graeme Roy, Director of the Fraser of Allander Institute, said, “Following the referendum result we predict a significant slowing in the rate of growth in the Scottish economy. The combination of economic and policy uncertainty coupled with the longer-term structural consequences for trade and investment from leaving the EU, make the outlook much more pessimistic than before.

“Given Scotland’s fragile economic performance over the past 18 months, the impact of the EU referendum result is exactly what the Scottish economy did not need.

“The top priority has to be retaining access to the Single Market which will help mitigate some of the most damaging effects on investment, trade, productivity and jobs. Whether or not this can be achieved without freedom of movement is highly uncertain.”

This special edition of the Economic Commentary was prepared in response to the outcome of the European Referendum.

Published: 27 July 2016

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