Fraser of Allander Institute: Scotland facing deepest recession in living memory

The Scottish economy is now in its deepest recession in living memory, according to the latest Economic Commentary by the Fraser of Allander Institute at the University of Strathclyde.

Fraser of Allander Institute: Scotland facing deepest recession in living memory

The Institute points out that whilst the depth of the collapse in GDP is largely artificial and entirely due to the lockdown, what matters is how quickly activity bounces back once the restrictions are lifted.

All signs are, however, that there will be some scarring and it will take some time before the economy recovers to a ‘new normal’.

The commentary considers a range of scenarios from a more optimistic scenario where confidence builds momentum, through to a more pessimistic scenario which includes a second wave of infection.

In the optimistic scenario, the economy is projected to take until the end of 2021, at the earliest, to fully recover lost output. In the pessimistic scenario, it could be 2024 before a ‘new normal’ is reached.

The Institute also points out that even when the economy returns to growth, the underlying structure of Scotland’s business base will be altered forever.

The Fraser of Allander Institute has highlighted four key priorities for policymakers during the re-start.

  • Firstly, it is crucially important to avoid a second wave of infections. The need for an effective testing and tracking regime at scale is urgent. The fact that it is still not in place is a concern.
  • Secondly, government needs to develop an effective plan for the safe return of schools to let parents return to work. Failure to do so risks extending the economic crisis and widening inequalities.
  • Thirdly, it is vital that policymakers get the timing of the lifting of financial support measures right and that this aligns with when restrictions are lifted. All the evidence points to many small businesses having few reserves to survive at reduced levels of demand. Lifting support too early and/or delay in the easing of restrictions, even by a matter of weeks, and the knock-on impacts across the economy, will be severe.
  • Fourthly, much will depend upon how consumers react to the easing of restrictions. Will it lead to a spike in demand, as delayed spending comes back on stream, or will spending remain subdued if employment expectations remain fragile? Government has a role in building confidence amongst consumers and businesses – not just in terms of actual policies but clarity and consistency of message.

The Insititute wrote: “Of ongoing importance is making sure that we protect the most vulnerable in society – and in particular, those at greatest risk from economic harm because of poverty, health or wider inequalities.”

Professor Graeme Roy, director of the Institute, said: “The near 20% drop in economic activity in April for Scotland highlights the scale of the economic crisis that we face. So far, as a result of the major government support initiatives that have been put in place – including around 750,000 employees furloughed or supported through the self-employment scheme – the impact of the full effects of the crisis have been dampened.

“Sadly, it is only now once we start to switch the economy back on that the crisis will hit home with a raft of redundancies and business closures likely over the summer.

“In looking to the future, there is one important take-away from all this. Yes, there are debates to be had about the nature of growth, how it is distributed, and its sustainability. But the importance of a prosperous economy for our collective ‘wellbeing’ – one that provides financial security for families, creates opportunities for our young people and supports innovative and vibrant businesses – cannot be overestimated.” 

Steve Williams, senior partner for Scotland at Deloitte, added: “COVID-19 has presented businesses with their most significant and unpredictable challenges in decades, with wide reaching economic and societal implications of lockdown changing life as we know it.

“For the majority of organisations and consumers, the lockdown on non-essential parts of the global economy has left a scar on finances, with businesses and some individuals likely to emerge with a combination of higher debt and weaker financial reserves.

“What’s crucial, and as this commentary sets out, is that we give our economy the best chance of recovering quickly so that inequalities are not simply left to grow. Businesses across all sectors have a key role to play; they must be flexible and willing to innovative as the country adjusts to a lower growth world. Leaders must use this time to think about the organisation they want to be in the future. We must take this opportunity to change businesses for the better.”

  • Read all of our articles relating to COVID-19 here.
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