Disorderly Brexit 'risks Scottish recession'

A disorderly Brexit risks a deep recession in Scotland, according to researchers.

The Fraser of Allander Institute (FAI), part of the University of Strathclyde, predicts a loss of more than one £1 in every £20 of output from the economy.

It suggests the fall from peak to trough in the economy could be around 5.5% of total output, contracting for two whole years.

This is in line with forecasts made by the Bank of England for the UK economy.

The FAI modelled several possible Brexit outcomes and the impact in its latest economic commentary. This included scenarios of a no-deal Brexit with and without policy response.

Possible growth

Despite the potential for loss, researchers expect the damage to be offset by action taken by governments and the Bank of England.

And the FAI has set out a possible growth path for the Scottish economy which could see it outperform current estimates if Brexit is well-managed, business confidence returns and investment picks up.

The central forecast for the economy is slightly weaker than the last such report from the economics institute.

It predicts only 1.1% growth this year, followed by 1.4% next year and 1.5% the year after.

While much economic attention has been focused on Brexit in recent months, the economists warn that major questions are being ignored or avoided by governments in Edinburgh and London.

Reflecting on the difference made by the Scottish parliament 20 years after it was first elected, Wednesday’s report says the weakest part of its performance has been “the lack of evaluation and scrutiny of the effectiveness and value of policy initiatives”.

It questions whether there has been any progress on a Whitehall initiative to find ways for governments and their agencies to work better together in the interests of the Scottish economy.

‘Scale back oil’

It says there should be a renewed focus on sustainable growth, after most targets set by the incoming Scottish government in 2007 have been missed.

The report says there is a need to address big structural changes coming to the economy, including demographic change, the scaling back of the oil and gas sector, automation and emerging economies around the world.

At the same time, it says there should be an assumption that government budgets will remain tight, demand for the health service continues to grow, and little discussion takes place of the squeeze on public services that are not protected by having the high priority for the NHS and schools.

The report calls for stronger cross-party co-operation in the Scottish Parliament, pointing to the impasse on Brexit in Westminster as the outcome of consensus policy-making breaking down.

First Minister Nicola Sturgeon will focus on Brexit when she speaks at the STUC conference in Dundee later, where she is expected to say nobody should pretend that the “damage” of Brexit can be fully mitigated,

She will also warn that Brexit, in any form, will harm living standards and risk jobs.

An extension to Article 50 was granted earlier this month, meaning the UK will not leave the EU until 31 October unless Prime Minister Theresa May can get her withdrawal deal – which has been rejected three times by MPs – agreed in Parliament before then.

The UK government has been holding talks with Labour in a bid to break the deadlock, with Mrs May saying she still wants the country to leave before 22 May to avoid European elections being held the next day.

Mrs May has pledged to pursue an “orderly” Brexit while acknowledging that “the whole country is intensely frustrated that this process of leaving the European Union has not been completed.”

Meanwhile, the government is continuing to make plans for the UK leaving without a deal.

Graeme Roy, director of the Fraser of Allander Institute, said that last week’s delay in the deadline for Brexit only “kicked the can down the road”, with little evidence so far of UK policy makers being able to agree a compromise approach. The risks to the economy therefore remain high.

He added: “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.”

John Macintosh, tax partner at Deloitte, the accountancy firm that sponsors the regular Allander economic commentary, said the latest report underlined strong employment figures, but there is a pressing need to encourage investment and to improve productivity”.

He called on business to “think differently, adopting a more ambitious and medium-term outlook by investing in innovative and collaborative strategies as well as talent”.