The Scottish Fiscal Commission (SFC) published their latest economic and fiscal forecasts today.
As expected, there has been a huge improvement in Scotland’s economic outlook since the previous forecasts in January 2021, reflecting the success of the vaccine rollout and efficacy.
What do the latest forecasts tell us?
Economic recovery from COVID-19
In January the outlook for the Scottish economy was poor, with economic growth forecasted at 2% in 2021. At the start of the year the Scottish economy was not expected to reach its pre-pandemic peak until 2024.
8 months on and the outlook for the economy has improved significantly.
All eyes are on the latest SFC forecasts which sees the Scottish economy growing by 10.5% in 2021/22, with economic output reaching its pre-pandemic levels by 2022 Q2; around two years sooner than forecasted at the start of the year. See Chart 1.
These improvements to the economic outlook add almost £900m to income tax forecasts for 2021/22. But it is critical to remember that this does not mean an extra £900m of spending for the Scottish Government; similar improvements in the UK outlook will offset these forecast upgrades to a large extent (we will need to wait until the OBR forecasts on 27 October to get a more detailed picture).
Chart 1: Trends and forecasts in Scottish GDP, 2019 Q4 – 2023 Q4
Source: SFC; Scottish Government
The vaccination programme has significantly reduced COVID-19 hospitalisation rates which has allowed our economy to swiftly open again.
But it is not just the vaccine rollout that has driven optimism.
Sectors of the economy have bounced back faster than anticipated. Education began its phased return in February meaning that economic output in this sector was higher than expected in January’s forecasts.
Additionally, household savings have increased massively throughout the pandemic. With the economy now reopened, it is expected that households will spend some of the savings that they have accumulated over the year. The SFC forecast savings to fall to 8% in 2021 Q4, down from its peak of 28%, and then decrease further to an average of 6% for the rest of the 5-year forecast period.
How is unemployment expected to fare?
The furlough scheme has supported the labour market significantly throughout the pandemic however, with the job support scheme due to end on the 30th of September, the SFC forecast unemployment to peak at 5.4% in 2021 Q4. This is a downwards revision from its January forecast peak of 7.6% in 2021 Q2 – equivalent to 58,000 fewer unemployed.
Whilst the economic outlook has improved since the start of the year, there still remains a great deal of uncertainty, particularly around employment. The furlough scheme has masked the true impact of the pandemic on employment and only after the scheme ends next month will the effects of the pandemic crystallise.
The end of furlough and labour shortages
Similar to other forecasters, the SFC stresses an uneven nature of recovery across sectors and regions. Some sectors, particularly those that have rebounded strongly in recent months, face recruitment difficulties which are adding to wage pressures.
With a significant share of the economy still on furlough there are not as many workers available to fill the jobs required to meet the unexpected high demand in the economy.
Workers in certain sectors, like hospitality, may be unwilling to switch jobs due to the fear of losing furlough eligibility in the event of another lockdown or reintroduction of restrictions.
These mismatches in labour supply and demand across sectors and places will take time to resolve. Ensuring these mismatches are tackled promptly will be a major focus for policy in the months to come.
But there remain 140k on furlough, and the SFC expects at least some of these to move into unemployment as the scheme ends.
How do the SFC’s forecasts compare to others?
The SFC’s forecasts for the remainder of 2021 and early 2022 are broadly in line with the August forecasts of the Bank of England and NIESR.
The SFC follows its tendency to be slightly more cautious about the speed of recovery in economic output, but not to any major extent.
What factors could change the current outlook?
Forecasts of the economy are exactly that, forecasts. Just as the projections have significantly improved since January 2021, they could also significantly worsen, depending on Scotland’s recovery path from COVID-19.
The two main factors that could slow down Scotland’s recovery are –
- A fourth wave of rising COVID-19 cases; and,
- New variants of COVID-19 that the current vaccines do not provide enough protection against.
Both of these scenarios could lead to the reintroduction of COVID-19 restrictions/another national lockdown, which could hinder any economic recovery.
Looking further ahead
Looking longer term are some big fiscal challenges facing the Scottish Government.
These include the rollout of the new Adult Disability Payment in Scotland from 2022. The broader eligibility criteria of this payment relative to the UK’s Personal Independence Payment which it will replace are forecast to add £0.5bn to SG spending by 2026/27.
The latest forecasts are very different from those previous in January, but this was entirely expected – there are no big surprises here in the context of recent data and recent judgements by other forecasters.
Despite an improved outlook, significant challenges and uncertainties lie ahead over the next few months. Particularly in terms of how the economy will adapt to structural changes, which have left some sectors facing big supply shortages while many workers in the economy are still on furlough.
Additionally, with the recent spike in COVID-19 cases around Scotland, and discussions of ‘circuit breaker’ taking place, there is a risk that the reintroduction of COVID-19 restrictions could knock Scotland’s recovery back.
Unfortunately, budget implications of forecasts are less clear cut without similarly updated forecasts from the OBR, which we won’t get until October.