Coronavirus, Scottish Economy, UK Economy

A brief comment on coronavirus and the Scottish economy…

We’ve been asked in recent days for our take of the impact of the coronavirus on the Scottish economy.

Of course, it goes without saying that the economy is very much secondary to the health implications and the risks to individuals and families.

So before going any further, it’s important that we take a step back. This is primarily about people – people being ill and not being able to work or because they have been advised to self-isolate; and people not travelling, congregating or spending like they would normally because they are self-isolating or trying to limit their exposure to the virus.

The immediate outlook

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 for a ‘significant impact’ on the economy.

But what else do we know.

A first issue is timing. At a macro level, some effects will be temporary, e.g. time taken off sick, or holidays postponed, with a likely bounce-back further down the line. The gumming-up of supply-chains may also be time-limited for many. Once the immediate crisis subsides, firms seek to replenish stocks and meet delayed demand.

But the worry is if these last for a relatively long-period of time. This combined with a more global recession/slowdown, raises the potential for more permanent scarring.

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.

Most exposed are likely to be businesses relying upon ‘social spending’ – i.e. 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.

Also likely to be highly exposed, will be individuals and businesses who have little buffer to cope with any sharp slowdown. Small businesses in particular, may find themselves struggling with lost demand, at the same time as having to foot the bill for sick pay for those who fall ill or self-isolate. Most small businesses operate with limited cash reserves (perhaps as little as a few weeks) so cash-flow will be paramount.

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 policy response

Policymakers have already moved swiftly.

Key will be ensuring that there is sufficient support in place to help firms get over what is likely to be an effective partial shut-down of our economy until things return to normal.

The Bank of England have already cut interest rates to stimulate demand. More interventions are likely, particularly to keep liquidity flowing around the economic system as a whole.

Last week’s Budget contained a range of measures. Those who are affected directly, including both diagnosed individuals and those self-isolating in line with government advice, will be eligible for Statutory Sick Pay from day one if they are eligible.

For those not eligible there has been a relaxation on some of the rules on Universal Credit. It should also be easier for anyone to access wider support as a result of coronavirus, including relaxation of the requirement to attend a jobcentre if they have been advised to self-isolate.

These measures work through reserved policy channels and will be available in Scotland.

Whilst a good start, 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.

For example, Statutory Sick Pay is equivalent to around £95 a week.

Someone working 35 hours on minimum wage would see their income drop by two thirds.  And if people are expected to go on to Universal Credit, for a single adult that’s around £75 a week so they’re looking at an even bigger drop – and a potential delay in getting the money. Some people may find themselves in a difficult financial predicament and feel they have no choice but to carry on working (putting at risk attempts to curtail the spread of the virus).

Alongside support for individuals, the Budget contained measures to support small businesses.

To mitigate impacts on costs, small businesses will be able to claim back up to two weeks of sick pay. Again, as this is reserved, the measure will extend to Scottish firms.  A new temporary loan scheme is to be launched, offering bank loans of up to £1.2m.

On paper, these look sensible measures.

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 – quite rightly – 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.

With this in mind, there will be an important onus not just on policymakers, but all of us as consumers, to play a role in supporting such businesses through tough times. Shopping locally, visiting local restaurants and supporting our local tourism industry will all make a difference.

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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The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.