FAI Economic Commentary: Light on the horizon offers optimism through the winter

Vaccination hope provides boost as we start on recovery but long road ahead

While many parts of the world continue to introduce new lockdown measures – there is tentative optimism for the year ahead, according to the latest Economic Commentary by the Fraser of Allander Institute at the University of Strathclyde.

As we speak, initial rollouts are beginning of vaccines that will aim to ensure that 2021 will be a better economic year for Scotland than 2020.

Despite this welcome news, it will take some time for the country to get to a point where significant restrictions can be eased. This will continue to have a particular heavy toll on key sectors in our economy, such as tourism and hospitality. Moreover, the roll out of a sustained vaccination programme across the world will take many months, meaning that the global outlook – crucial for Scotland’s exports and investment prospects – remains hugely challenging.

As a result, the ongoing economic crisis remains severe: there is still a hard recovery to come. With unemployment soon to rise, and a renewed squeeze on wages across the public and private sector, it will feel like Scotland is in a recession for some time yet.

The Institute today set out three possible scenarios for growth: a central scenario, and then ones that are more optimistic or pessimistic. It is worth saying that due to the optimistic vaccine news that these scenarios are all more positive than in the September Commentary. However, our central scenario sets out that it is still likely to be the middle of 2022 before growth gets back to pre-pandemic levels, with unemployment remaining well above pre-COVID rates for longer-still.

Mairi Spowage, Deputy Director of the Institute, said: “The recent news of vaccine developments is extremely positive for all of us. However, businesses who have survived to this point are likely to still face significant challenges to get through to the point where any economic recovery will be fully underway.

“We have seen in recent weeks the decline of major employers whose demise has been caused or exacerbated by the COVID crisis. Whilst we saw some recovery over the summer months as restrictions were eased, activity is still well below pre-pandemic levels: and economic activity is likely to have taken a further hit as restrictions were reintroduced over October and November.

“Many families will welcome the chance for a brief respite this Christmas as restrictions are eased. But it may well require further restrictions in January to get the virus back under control. And we should not forget of course the end of the EU Exit Transition period in just over two weeks’ time, which will lead to disruption for many firms who have weathered the COVID crisis thus far.”

A key feature of this crisis has been the unprecedented levels of government support that have been put in place to help businesses and individuals cope. A vital measure has been the UK Government’s furlough scheme, which has now been extended to the end of March 2021.  

Despite the furlough scheme, unemployment is forecast to rise to 7.5% by the second quarter of next year as this scheme is rolled back. This is around double the rate we have been used to in recent times. 

Business support schemes and other measures have seen an additional £8.2 billion flow to the Scottish Government to spend on supporting the economy through the pandemic.

Steve Williams, senior partner for Scotland, at Deloitte, said: “Our latest CFO survey showed that business leaders are expecting demand for their own businesses to recover to pre-pandemic levels after the second quarter of 2021. Finance leaders are also rating Brexit as one of the top risks facing their businesses and it’s clear CFOs expect the type of exit the UK makes from the EU to make a big difference to business activity.

“While businesses focus on the interplay between COVID-19 and Brexit in their future plans, they will need to find ways to adapt and transform. Investment in technology, innovation and skills will be a key factor in their recovery, as will taking advantage of new opportunities such as those presented by a green recovery.”

In their annual Scotland’s Budget publication, the Institute also looks ahead to the Scottish Government Budget for 2020-21, due on 28th January 2021.

David Eiser, Head of Fiscal Analysis at the Institute, said: “Despite the overall increase in the budget of £2.4 billion, it is likely that Kate Forbes will have some difficult decisions to make.

“The pandemic has shone a spotlight of some of the inequalities that exist within our society, which have only been exacerbated in recent months. It is now more important than ever for the Scottish Government to consider how its Budget will impact across different groups of the population, or different areas of the country, or indeed different parts of our economy.

“However, it should be remembered that the Scottish Government has limited scope to adapt its fiscal plans. Whilst the SG has a good idea of the likely minimum funding envelope, the ongoing dependence of the Scottish Budget on policy choices made in England will continue to be a source of tension. There is certainly a case for greater inter-governmental coordination and communication, and perhaps for funding certainty and fiscal flexibilities.

This edition of the Fraser Economic Commentary also includes three articles

  1. “Scotland’s Budget Report 2020”, David Eiser
  2. “Estimating the Elasticity of Substitution between Capital and Labour”, Julija Harrasova
  3. “A guide to Scottish GDP”, Milan Marcus & Adam McGeoch

You can read the latest Economic Commentary here.

Authors

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

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