Scotland on brink of Brexit recession

Prof Graeme Roy

In its latest Economic Commentary, supported by Deloitte, the research institute also argues that with Brexit dominating the headlines, important questions about the future longer-term trajectory of the Scottish economy are being crowded out.

The report’s authors said the decision to extend the deadline for the UK’s withdrawal from the EU has provided some welcome temporary respite from recent months of heightened economic uncertainty, but only for a short while with the range of scenarios as wide as ever,

And the report lays out the different possible outcomes for growth in Scotland over the next few years, which include those ranging from a disorderly exit from the EU, in which case Scotland is likely to enter recession, to a scenario where confidence returns, unlocking business investment and boosting the economy to nearer trend growth.

The Institute’s central forecast, based on an orderly departure at some point in 2019, predicts growth of 1.1 per cent in 2019 and 1.4 per cent and 1.5 per cent for 2020 and 2021.

The report shows that economic growth has remained steady over the course of 2018, with growth being fairly broad based, employment at a near record high and unemployment at a record low.

However, critically, earnings and productivity growth remain weak which present challenges for Scotland’s long-term growth prospects.

Professor Graeme Roy, director of the Fraser of Allander Institute, said: “Last week’s announcement to move the deadline for the UK’s departure from the EU to October has helped to reduce the imminent threat of a ‘no deal’ outcome impacting upon the Scottish economy.

“However, it has only ‘kicked the can down the road’ with little evidence so far of UK policymakers being able to agree a compromise approach. The risks to the economy therefore remain high.

“Moreover the nature of the UK’s withdrawal from the EU is but one step in the process – the negotiations on the terms of the UK’s future relationship with the EU have yet to begin in earnest.

“But Brexit should not be the only focus of attention. One consequence of the Brexit debate is that it has left little room for discussion of the emerging structural challenges and opportunities our economy is facing.”

The report goes on to discuss some of the key longer term economic challenges and opportunities facing Scotland, including how to shift the dial on productivity, earnings and in-work poverty.

John Macintosh, tax partner at Deloitte, said: “The latest Commentary underlines that while Scotland’s economy continues to deliver high levels of employment and steady, if low, growth, there is a pressing need to encourage investment and to improve productivity. This should increase our long-term growth and help generate an improvement in real earnings growth and living standards.

“While business tries to adapt to working within an environment where uncertainty is the new norm, a cautious approach is understandable. However, for Scotland to address its structural economic and fiscal challenges and opportunities, this quarter’s Commentary highlights that a bolder and more collegiate approach is required. Business should continue therefore to try to think differently, adopting a more ambitious and medium-term outlook by investing in innovative and collaborative strategies as well as talent.  Such an approach should help to create a more robust business climate that can be more agile to any challenges and opportunities as they arise.”

Professor Roy added: “Next month will mark 20 years since the first elections to the Scottish Parliament, and despite progress in some areas, the growth challenge is arguably still something that remains inadequately addressed in the political discourse in Scotland.

Key government targets on the economy – including in growth, exports and productivity – have all been missed. One particular area of concern for the Scottish Government is the emerging outlook for some of Scotland’s devolved tax revenues, which suggests that revenues may have performed worse than forecast in recent years.  

“Those who established the Scottish Parliament had the hope that politics here in Scotland would usher in a new era of collective effort and decision making.

“With Brexit marking the most significant structural change in our economy in over 40 years, the need for that approach is now more crucial than ever.”

To download the latest Fraser Economic Commentary (April 2019) - click here
To view the economic commentary, articles and video please follow this link.