Fraser of Allander Institute: Coronavirus will have significant impact on economy

The University of Strathclyde’s Fraser of Allander Institute has said that due to the outbreak of Coronavirus, we should expect a significant impact on the economy.

Fraser of Allander Institute: Coronavirus will have significant impact on economy

Commenting on the outbreak, the institute said: “With so much uncertainty about the spread of the virus, the impact it might have, the timing of when to expect the worst effects, and the policy response, any exact ‘forecast’ of the scale of economic impact is nigh-on-impossible.

“Instead, it’s much more important to understand the channels through which we can expect to see our economy impacted. One thing we do know however, is that even just as a result of the public health response already – with major sporting events postponed, mass gatherings prohibited etc. – and warnings that up to a fifth of working age people could be off work at any one time, we should expect a significant impact on the economy.”

The Fraser of Allander Institute urged that the first issue with the outbreak is timing. As some effects of the virus will be somewhat temporary, such as time taken off sick, holidays postponed, with a likely ‘bounce-back’ over time. The stagnation of supply-chains may also be time-limited for many, as once the immediate crisis abates, companies will seek to replenish stocks and meet delayed demand.

However, the institute has revealed that the worry related to whether these problems drag on for a relatively long period of time. This issue, alongside a global recession/slowdown, increases the potential for more permanent problems.

The Fraser of Allander Institute further highlighted: “A second important issue, is that the impacts of the pandemic will vary by firm, sector and market-place. The ability of each business to flex over time to cope with disruption will be crucial.

So, whilst the underlying growth potential of our economy may recover, the make-up of the economy that emerges may look quite different.”

The institute said that those businesses most exposed to problems are restaurants, retail and entertainment firms. Tourism– particularly firms relying upon overnight stays (such as many small hotels, guest houses and tour operators) – are also likely to be in the front line of any sudden drop in demand. Again, whilst many of the impacts will be temporary (people will take holidays in the future), a collapse in demand even just for a short time will put a significant strain on many businesses.

individuals and businesses who have little buffer to cope with any sharp slowdown are also likely to be highly exposed. Small business specifically, might find themselves struggling with a reduce in demand and simultaneously, may have to pay the upfront costs for sick pay.

The Fraser of Allander Institute continued: “For individuals who are off work, many will have recourse to occupational sick pay schemes, but those on lower wages are more likely to have to rely on the relatively ungenerous statutory sick pay scheme. Self-employed – and gig-economy – workers have far less protections.

So whilst the immediate impact might be ‘temporary’, the objective for economic policymakers will to make sure that the scale of the temporary shock isn’t sufficient to cause longer-term damage to the economy.”

The institute urged that they key within the policy response to the virus, will be ensuring there is sufficient support in place to help firms get over what is likely tobe an effective partial shut down of the economy until normality returns.

With the Bank of England cutting interest rates, measures put in place in the government’s budget, relaxation on the rules of Universal Credit being labelled as a good start, the institute has said that it is likely that the government will already be thinking about what more it could do, particularly if the impact lasts for longer, and we want to incentivise people to stay at home and not work if they have milder symptoms.

The Fraser of Allander Institute importantly highlighted the worries for the future within businesses. It said: “But one challenge will be ensuring that businesses, many of whom will have little interaction with such schemes in the past and will be nervous about their future, get access to the right support as soon as possible.”

The Scottish Government announced on Saturday a range of business rates support measures. This included an £80 million fund to provide grants of at least £3,000 to small businesses in sectors facing the worst economic impact of COVID-19 and targeted reliefs for retail, hospitality and leisure sectors with a rateable value of less than £69,000.

What is clear that both governments are prepared to ‘do what it takes’ to support the economy through the crisis.

There is support out there for businesses, and businesses should reach out as soon as possible to government agencies, and their banks, for help and to discuss the range of schemes on offer.

Much of the support is targeted at the sectors in the front-line, such as retail and hospitality, but the nature of the situation faced is that there will be externalities everywhere and with some businesses facing a near complete shutdown of demand for a period of time, it remains to be seen if these measures will be enough.

The Fraser of Allander Institute urged that consumers also have an important role to play in supporting such businesses through tough times. The institute said: “Shopping locally, visiting local restaurants and supporting our local tourism industry will all make a difference.”

The institute concluded: “And of course, by following public health advice we too have an important role to play in ensuring that the worst effects of the pandemic are mitigated as best as possible. Getting through the next few weeks and months safely and healthy will ultimately be the best thing we can all do for our health and the economy.

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