KPMG: Scotland facing severe economic downturn with North East worst affected

Scotland is facing the “most severe economic downturn in modern times” as the continuing impact of the coronavirus pandemic is expected to see the Scottish economy contract by 6.8% in 2020, according to KPMG UK’s latest quarterly Economic Outlook.

KPMG: Scotland facing severe economic downturn with North East worst affected

Catherine Burnet, Scotland regional chair at KPMG UK

The two Scottish local authority areas predicted to be hit hardest over the next year are Aberdeen City and Aberdeenshire, with economic hits of 8.6% and 8.5% respectively. The local authority expected to least impacted is West Lothian, with a predicted 5.0% economic decline in 2020.

KPMG has said that the economy is unlikely to be able to fully restart until a vaccine or effective treatments for the virus are available.

Four alternative scenarios were considered for the timing of the recovery, based on potential different dates of the pandemic being eradicated in the UK.

KPMG’s main scenario assumes that a vaccine will be available from July 2021, enabling all social distancing measures to be removed and pandemic-related uncertainty to dissipate by the following month.

However, Scotland could start 2021 with another negative shock to the economy due to the end of the transition period with the EU, with GVA (Gross Value Added) contracting at least during the first quarter of the year. Based on the same scenario, the UK’s economy is forecast to contract by 7.2% in 2020, rising by 2.8% in 2021.

Economic recovery next year could be hampered by Brexit. KPMG’s forecasts assume that a deal will be reached by the end of this year and this will enable the UK to trade with the EU with no tariffs or quotas and will cover some services.

However, even without tariffs, some additional trade friction may not be avoided due to the need for customs and other inspections. Therefore, exports are expected to fall back at the start of next year despite some recovery in many of Scotland and the rest of the UK’s export markets. An end to the transition period with no deal, or with a more limited trade deal, would see a much weaker economic recovery next year.

Catherine Burnet, Scotland regional chair at KPMG UK, said: “Our latest economic modelling highlights the scale of the challenges ahead for Scotland as it faces the most severe economic downturn in modern times, with no clear end to the current crisis. Considerable uncertainty remains around the timing of a vaccine which will impact the timing and speed of the recovery, as well as the extent of any permanent damage to the economy.

“That said, there are some tentative signs of a pick-up in activity and we expect to see a partial recovery in the second half of this year as the gradual easing of restrictions brings light to more corners of the economy. However, a full resumption of activity is unlikely until a vaccine or effective treatments for COVID-19 is found.

“The pandemic will leave a lasting mark on the economy. We all need to adjust to a new future, not just to the current recession, and make the most of the hand we’ve been dealt to build something better for us all. That could be doing more to help the environment, investing more in our essential workers, or matching our universities with local businesses to improve regional productivity. If we get this right, the future may well be a lot brighter.”

Martin Findlay, senior partner at KPMG UK in Aberdeen, highlighted that before lockdown, the North East was already facing major economic challenges as the energy sector battled with oil price fluctuations and a global effort to move towards significant climate reduction targets.

He said: “The huge decline in global demand for energy during the pandemic has significantly impacted producers and, consequently, the supply chain. Companies are facing the prospect of significant headcount reductions or restructuring. However, there is always a glimmer of hope.

“We’ve been here before and Aberdeen, more than any other Scottish city, has become accustomed to the big rises and falls. What is now needed is a truly combined effort to revitalise the economy, accelerating some of the progress that was being made on diversification of the region’s industry, and greater innovation in energy.”

Despite heavy support from the government’s Job Retention Scheme (JRS), the current crisis is having a material impact on the labour market. Lockdown restrictions imposed to combat the pandemic have created a weaker economic environment which could see the UK-wide unemployment rate averaging 8.6% this year and 11% in 2021.

Early data on regional labour markets shows an increase in unemployment claimant count of 63% in Scotland between March and April – slightly below the UK average of 66%.

James Kergon, senior partner at KPMG UK in Glasgow, added: “The gradual winding down of the Job Retention Scheme may well result in a sudden change in fortunes for many workers throughout Scotland. Government intervention has played a huge part in helping to mitigate an initial economic shock, but the easing of lockdown measures and a gradual ‘return to work’ for many doesn’t mean life will get back to normal. For many sectors, the challenges of social distancing and radically altered consumer behaviour will mute any short term ‘bounce back’.

“There is some optimism, though, in the figures. A number of English regions have particularly narrow concentrations of industries, placing them at higher risk of economic damage. Scotland’s economy has diversified significantly over recent years, which should help to mitigate some of the impact we’ll feel from the most at-risk sectors, including tourism, hospitality and retail.”

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