Uncertain outlook at key crossroads in the recovery
Uncertainty at every turn as Scotland’s economy struggles to recover
The Scottish economy is at a key crossroads in its recovery from the COVID-19 pandemic, with the outlook particularly uncertain, according to the latest Economic Commentary by the Fraser of Allander Institute at the University of Strathclyde.
The Institute points out that whilst a fragile recovery is underway, the economy is still well below levels of activity that we had before the start of the crisis.
On the upside, provided that the virus is contained, we could see growth continue to pick up as consumers and businesses gain confidence. However, even in this scenario, it is likely to be a slow recovery with the economy not returning to normal until a vaccine is rolled out at scale.
There are however many reasons to be much more pessimistic. The new restrictions, due to the surge in cases in recent weeks, are likely to further constrain the rate of growth. Many businesses who were already operating under significant stress are likely to suffer further under these new restrictions. With the scaling back of government support in the next few weeks, many of the negative economic effects of the crisis – some which have been hidden through initiatives such as the furlough scheme, the business bounce back loans and mortgage holidays – are likely to escalate.
Following the tentative recovery we have seen, and with output still around 10% smaller than it was back in February, the Institute’s economists consider a range of scenarios for the future time path of the Scottish economy. It includes a more optimistic scenario where confidence builds momentum, through to a more pessimistic scenario which includes a second significant lockdown over the next couple of months or so.
In the optimistic scenario, the economy is projected to take until the middle of 2021, at the earliest, to fully recover lost output. In the pessimistic scenario, it could be 2024 before a ‘new normal’ is reached.
On balance, the Institute’s weight of expectation is on the more pessimistic outlook at this stage. Even if a second lockdown is avoided, challenges around testing and tracing, the onset of the winter months and the infection rate of the virus itself, means that large scale social distancing is here to stay for the foreseeable future. Our economy is likely to remain in limbo for at least the next six months.
Mairi Spowage – Deputy Director of the Institute – said: “Whilst a tentative recovery is underway, the economy is a long way off where it was before the start of the crisis.
“We have therefore reached a crucial crossroads in our recovery from the crisis.
“What happens next will depend on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors. All of these remain hugely unclear.
“What is striking about the immediate outlook is just how uncertain it is - indeed, it is hard to think of a past occasion when the range of possible outcomes has been so wide. What we can agree on however, is that the task of rebuilding our economy will take years.
Steve Williams, Senior Partner for Scotland at Deloitte, said: “COVID-19 has been one of the most disruptive events that modern society and businesses have experienced, and it’s undoubtedly been a major test for leadership teams. As the Commentary sets out, what happens next will depend on a variety of factors, including how businesses respond. The coming months will bring a range of challenges and it is important that leaders are building resilience and agility into all parts of their business to enable them to react at pace, whether that be the ability to allocate resources to the areas of biggest growth or creating a more adaptable supply chain.
“A more resilient organisation will also be vital to tackle the uncertainty of Brexit, alongside the COVID-19 crisis. With just three months until the end of the transition period, and an ever increasing risk of no-deal in the UK/EU negotiations, businesses must get prepared. There are several areas of change already known for supply chains, immigration, regulation, trade and customs processes. These changes need to be implemented whether or not there is a trade agreement with the EU.”
In the Commentary, the Institute discuss that the ending of the UK Government’s furlough scheme promises to be a pivotal moment in the recovery.
But removing the furlough scheme too early, particularly in sectors like hospitality and tourism, has the potential to undermine the good work done to date.
The new Job Support Scheme announced last week is designed to keep that support going but in a new format. Whilst welcome, it is much less generous than the furlough scheme. People will have to be back working and businesses themselves will have to pick-up the majority of the tab. Sadly, not all of them will be able to afford to keep their existing workforce in jobs.
Commenting on the policy response, Professor Graeme Roy, Director of the Institute, said: “History is likely to judge the Chancellor’s decision to pay 80% of workers wages during the height of the lockdown as one of the most effective policy responses to any economic crisis in history. Over 9 million workers have benefited.
“The new scheme is very different, and given the relatively minor subsidy it provides for wages, it is unlikely to protect jobs, hours and incomes in those sectors who are really suffering.
“Another policy announcement that will have significant consequences for devolved policy making is the cancellation of the UK Budget.
“Whilst the Scottish Government is due to see ‘indicative’ grant allocations for next year, this is only part of the Scottish Budget story nowadays. The cancellation of the UK Budget throws-up all manner of implications for tax devolution and public spending. In short, the Scottish Government will have to set policies not knowing their final budget allocations or how devolved tax policies will interact with equivalent tax policies set by the UK Government.
“Setting a Scottish Budget during such times was always going to be subject to great uncertainty. But the complex nature of Scotland’s fiscal framework – and the interactions between UK and Scottish tax and spending decisions – is only adding to these risks. This is not what the system was designed to do. Good fiscal systems should seek to minimise risks, not add to them.
“An effective budget process is all the more important this year given the proximity to May’s Scottish election.
“Both governments have a responsibility. Yes the Scottish Government needs to be much more open about the financial scenarios it faces. But the UK Government needs to have a much greater appreciation of the knock-on impact of its decisions, such as the cancellation of the Autumn Budget, on devolved policymaking. Devolution shouldn’t be seen as an afterthought.
This edition of the Fraser Economic Commentary also includes the four winning essays from our Economic Futures Essay competition, all of which are excellent reflections on the impact of the pandemic on the economy. These are:
- ‘The rich get richer and the poor get poorer’: exploring the impact of the COVID-19 crisis on the widening inequality gap. Catherine Bouchard, The University of Glasgow.
- COVID-19 pandemic, its impact on air quality and possible long-run effect on environment. Maciej Zieliński, The University of Glasgow.
- How Reliant are UK Universities on Tuition Fees and How Will They Adapt in a Post-Pandemic World? Lori McCluskey, The University of Dundee.
- COVID-19: Will the Economic Impact on Women Set Gender Equality Back Decades? Leanne Wilson, Glasgow Caledonian University.
Economic Futures is an initiative, funded by the Scottish Funding Council, designed to support the growth of young economists in Scotland.
To read the full report click here
Published: 30 September 2020