Unprecedented challenges to come for the Scottish economy – and whilst economy will recover long-term structural challenges starting to emerge

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The coronavirus outbreak has already led to a sharp economic downturn in Scotland; one that will undoubtedly change the shape of our economy in the long-run, according to the Fraser of Allander Institute.

In its latest Economic Commentary, the Institute says the virus outbreak represents an ‘unprecedented shock’ to the global economy that will trigger a recession, but that the collective efforts of business and policymakers is to ensure that this is – as much as possible – a ‘v-shaped’ recession, with activity picking-up once the public health crisis passes.

Professor Graeme Roy, Director of the Fraser of Allander Institute, said: “The large-scale mothballing of our economy in response to the public health emergency is unlike anything we have seen since World War II.

“Businesses and policymakers always knew that a global pandemic represented a major risk to our highly integrated global economy. But the pace at which this crisis has escalated has caught many off-guard.

“Assuming that the public health emergency will pass in the coming months, the hope of many is that that the economy should come out the other side with only a limited hit to its long-term productive capacity.

“But this is looking increasingly overly optimistic. The scale of the shutdown in our economy is so large it will take months, if not years, to recover, Key now will be ensuring that long-term scarring effects of any recession can be mitigated as much as possible.

“The economy that emerges from this, from the shops on our high street through to day-to-day working practices, is likely to look quite different.”

In this shortened Commentary, the Institute also assesses how different parts of the economy might be impacted.

Particularly exposed are services relying upon ‘social spending’, such as the tourism and hospitality sector, including, hotels, cafes and restaurants. This may have a disproportionate impact upon rural communities in Scotland, where smaller businesses and high numbers of self-employed people are prevalent.

Mairi Spowage, Deputy Director of the Institute added: Whilst there remain issues to be worked through, including how some of the government support schemes will operate in practice, so far the policy response has been well received. But things are clearly escalating quickly and changing day-by-day.

“The current situation – almost unthinkable just a few weeks ago – of the State stepping in to support wages will not only help families and businesses at this crucial time, but will act as an important bridge to support the recovery when it comes.

“As with all previous recessions, some individuals, businesses and local communities will be impacted more than others. Of particular concern – at list initially – were businesses relying upon so-called ‘social spending’, such as tourism businesses, cafes, restaurants and retail. These sectors will look very different in the future.

“The tourism – and wider entertainment – sector is vital for Scotland, particularly at this time of year. Around 13% of the Scottish economy and 19% of employment is made up of such sectors, including retail, hotels and restaurants.

“But with the much wider shutdown in our economy roll-out in recent days, all sectors of our economy are going to be impacted in a major way.”

John Macintosh, Tax Partner at Deloitte, said: “COVID-19 is a truly global crisis and its economic implications will be felt by all. Businesses across Scotland, the UK, and the rest of the world are, for one of the first times in history, facing many of the same challenges.

“In the face of crises, there are steps businesses can take to protect their future. Leaders should communicate openly with their people to reassure them the business is acting in their best interests. They should also listen to the needs and worries of their customers. This will be more difficult for some than others, but it provides an opportunity to understand what services your customers need now and what will help them and society in the long term.

“Finally, protect your business. Many companies are facing weeks, if not months, of difficult trading conditions. However we will get through this and if there was ever a time for the business community to pull together, to share skills, knowledge and resources, it is now.”

The report also highlights the impact on jobs and household incomes, with many families lacking sufficient savings to cover their bills for an extended period of time.

The Institute points out, for example, that only 42% of Scottish households in the bottom income decile would be able to cover one month of their regular income from savings. Around three quarters of households in the bottom decile would not have a sufficient buffer if they had to forgo regular income for 6 months.

The Institute raises several questions about the economy that will emerge from the crisis, including:

  • How will businesses survive through the crisis, and how many will be changed (or lost) forever?
  • What might be the long-term implications for economic policy and the social contract between the State and business?
  • How might current events impact our ability to cope with the major structural changes we know are coming in the years ahead (such as climate change)?
  • What lessons might we learn to combat future health emergencies, both here and abroad and how that might influence our attitudes to globalisation and risk?
  • To what extent might future ways of doing business change? And might this be a catalyst for a more considered view of how our economy interacts with wellbeing and tackles inequalities?
  • And might this be the circuit breaker that we need to move to more flexible (and online) ways of working?

Professor Roy said: “The economy that will emerge from this will look quite different and not just because many businesses may struggle to survive.

“How individual sectors and businesses will adapt over the next few months – from retail through to universities – will change behaviours forever.

“The government’s response to the public health crisis is arguably the first step on a new social partnership between the State and business, perhaps unlocking a much broader conversation about inequalities and sharing the proceeds of growth more evenly across society.”

The publication can be accessed 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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