How will the ‘double whammy’ of Brexit and a global pandemic impact Scotland’s economy?
“The world economy is on a tightrope,” the June 2020 OECD economic output report reads.
Coronavirus has triggered the most severe economic recession in almost a century, causing damage to both health and the economy.
In one year, the UK will have faced both a global pandemic and exited the EU. What will the impact of these two major events colliding have on Scotland’s economy?
Economy secretary Fiona Hyslop told parliament in June: “COVID-19 is the biggest challenge that we have faced in our lifetime.”
Uncertainty looms heavy on all questions around the future of the economy.
As Scottish Chambers of Commerce (SCC) chief executive Dr Liz Cameron told Holyrood: “The dual impacts of both COVID-19 and Brexit will have profound effects upon businesses and the economy. COVID-19 has frozen activity and shackled many sectors, creating widespread supply and demand problems. Brexit will be a different challenge as many aspects of our relationship with the EU and other countries will change.”
Meanwhile, Federation of Small Businesses (FSB) director of devolved nations Colin Borland told Holyrood: “Whatever happens, we can’t allow adapting to new post-Brexit operating conditions hamper firms’ efforts to recover from the coronavirus shock.”
On 12 August 2020 the UK officially fell into recession, after the economy shrank by 20.4 per cent. One year ago, in August 2019, Scottish unemployment had spent 11 months lower than the rest of the UK at 3.6 per cent to the UK’s 3.9 per cent.
Unemployment in Scotland has since risen to the highest rate in the UK – 4.5 per cent between May and July, with the UK rate at 3.9 per cent.
Employment in the UK over that period suffered the largest drop since the financial crisis in 2009, with 730,000 fewer people in paid employment than in March.
The number of people in work in Scotland fell by 15,000 between April and June as the impact of lockdown hit, with 736,500 Scottish workers on the UK Government’s Job Retention Scheme.
Economists say the full effect on employment will not be felt until the scheme ends in October, but more on this later.
The biggest economic issue facing Scotland in 2019 stemmed from the ambiguity around what trade would look like after Brexit.
There was fear around changing Brexit deadlines, with the UK’s economy showing signs of shrinking for the first time since 2012.
By September, then-Chancellor Sajid Javid declared the UK had “turned the page on austerity” and set out plans to raise spending across all departments, labelled as “grubby electioneering” by Labour.
Wages were another hot issue heading into the 2019 general election, with the Conservatives pledging to raise the National Living Wage (NLW) to £10.50 per hour by 2024. Days after the election, Citizens Advice Scotland analysis found 37,000 Scots were paid below the statutory minimum wage in 2018/19, calling for 2020 to be “the year the minimum wage must become a legal reality”.
Controversially, the OECD recommended the UK Government temporarily postpone future increases to the NLW, to support labour demand and reallocation of work. The Scottish Trades Union Congress (STUC) deputy general secretary Dave Moxham told Holyrood: “This is completely the wrong direction in which to travel.”
In the months before COVID-19, the priority for many businesses was avoiding a no-deal Brexit.
In September, MSPs voted to reject that outcome. As Brexit deadlines moved around, there was discussion about the potential length of the “transition period” – allowing the UK to remain in the customs union and single market to give some breathing space while new EU negotiations took place.
The UK began this period on 31 January and it will end on 31 December. There are still fears the UK could leave in December without a deal. The pandemic has massively delayed trade and security talks with the EU. According to reports in late July, British negotiators had only started to engage on contentious issues “in the last week or two”.
The Scottish Government sought an extension to the 31 December deadline, with its own economic modelling suggesting GDP could be between £1.1bn and £1.8bn lower by 2022 without a delay. The OECD also recommended the UK make a temporary arrangement to stay in the EU single market post-deadline. But, as SNP MP Joanna Cherry recently said, the chance of this happening was “negligible” and would only postpone “the inevitable”.
Scotland’s future could depend on being able to tailor post-Brexit migration policies to its unique economic demands.
In January, Nicola Sturgeon released a proposal for a Scottish visa offering a pathway for permanent settlement in Scotland with no salary threshold nor sponsorship requirements.
However, with immigration powers reserved, the Home Office quickly rejected the plan. The UK Government’s plan was labelled an “insult to Scotland” by the Scottish Government. The proposal caused further outrage over its aim to stop so-called “low skilled” migrants from working in the UK.
By March, coronavirus had saturated economic policy. New Chancellor Rishi Sunak unveiled the first of many unprecedented support packages on 17 March – a £350bn Treasury bailout including £330bn of government-backed bank loans for companies and £20bn in business rates relief and emergency grants.
“We have never in peacetime faced an economic fight like this one,” Sunak said. Six days later, the UK went into lockdown.
On 20 March UK Government unveiled its furlough scheme, allowing employers to claim a grant covering 80 per cent of furloughed workers’ wages.
It was later extended to October, with businesses expected to contribute from August. It’s estimated to have cost almost £30bn, covering 9.4m workers and 1.14m employers as of July.
Turning to GDP, in August 2019 the Scottish economy was expanding faster than the rest of the UK – with Scotland’s GDP rising by 0.6 per cent in the first quarter. This didn’t last long: by September GDP had contracted by 0.3 per cent in Scotland and by 0.2 per cent in the UK. But in 2020 GDP really took a hit.
Scottish GDP fell by 2.5 per cent in real terms in the first quarter, driven by a five per cent fall in output in March.
By the end of April – the first full month in lockdown – provisional data suggested Scotland’s GDP fell by a further 18.9 per cent.
Former Tesco Bank chief executive Benny Higgins was tasked with leading an advisory group to the Scottish Government on economic recovery. The Higgins report, released in June, warned £6bn needed to be injected into Scotland’s economy in the coming months, as well as a job guarantee scheme to protect 16-25-year-olds from “a tsunami of unemployment”.
In response, Hyslop released the government’s “economic recovery implementation plan” in August, pledging a £50m investment to support 20,000 young people in work, and a Scottish Job Guarantee.
This was labelled “woefully inadequate”, with the STUC saying it had hoped for “a bolder statement” on the job guarantee scheme and a commitment that no one would be employed on poverty pay.
Looking ahead, the SCC’s Cameron told Holyrood, the “double whammy” of Brexit and COVID-19 “has delivered a shock that will have repercussions for years but has also given us all time to rethink and reset” and called for an acceleration of Scotland’s entrepreneurial presence, globally “to promote our talents, assets and innovations”.
Meanwhile, Moxham said the STUC anticipated a “further wave of redundancies between now and Christmas as it is clear that Brexit will hinder economic recovery”.
“The UK Government’s migration policy could bring forth the apparent paradox of rising unemployment alongside skills shortages in certain sectors,” he said.
The Scottish Government believes a way out of the crisis is through a “wellbeing economy”.
As Hyslop said: “Change is always difficult and sometimes, unfortunately, in very tragic circumstances, the catalyst for an economic change has been born out of a very terrible tragedy.”