Jeremy Peat: Brexit impact will weigh on Covid economic recovery

1. Covid19 and the continuing uncertainties regarding both the progress of the pandemic per se and the short and longer term impacts of the virus across industrial sectors and population segments of our economy:

2. Brexit and the still under-estimated impact upon not only trade but aspects of our economy more broadly;

3. The prospect of indyref2, the debate thereon and how the outcome of any further referendum could impact in the short, medium and longer terms.

Apologies for stating the blindingly obvious. However, it is necessary to set out this position in order to argue that, from this economist’s perspective,there is such a mass of problems and uncertainties to deal with on the first two issues that it would be distinctly desirable for a full blown independence debate to be deferred until Scotland can look forward with confidence to stability and the scope for continuing enhancements of economic welfare.

The latest report from the OECD was encouraging for the UK and the global outlook. Indeed their forecast for UK GDP growth in 2021 shot up from 5.1% in March to a remarkable 7.2% – the fastest amongst the large, rich, countries.

Whilst this is good news, two caveats must be noted. First, this UK bounce back comes after one of the deepest of pandemic-induced declines; and second, even if this level of growth is achieved in 2021 and continues into 2022, it will still be the middle of next year before we return to the pre-Covid peak. (And this all assumes no need for further lockdowns.)

Scottish growth is also encouraging, with GDP up a massive 2.1% in March and output now ‘only’ 5.4% below the prior peak. Survey data suggests that 94% of businesses are now operating at near normal levels of activity, while there have been major declines in the percentage of workers furloughed, as activity picks up; and even signs of a recent increase in median pay rates after several months of decline.

In previous columns reference has been made to prospects of a ‘K-shaped’ recovery, with some segments of the economy recovering sharply while others continue to struggle.

As NatWest economists put it, ‘Covid amplifies polarisation between winners and losers’. Income inequalities are on the up again and a Joseph Rowntree Foundation report refers to folk from some one million homes expressing concern about potential eviction. This all suggests that in Scotland the shape of recovery should be as crucial as recovery per se and provide a sharp focus for policy makers and Budget allocators in the months and years ahead.

With a large dose of irony, the OECD report on the UK’s growth prospects notes that the outlook would be much improved by a closer trading relationship with the EU, while increases in border-crossing costs post-Brexit are damaging foreign trade.

Such impacts are evident in numerous anecdotal and survey-based reports of significant cost increases for EU imports and exports, as well as major delays in transit. This will really matter to many if not most Scottish businesses; and many households will be aware of problems in acquiring goods and services which are sourced within the EU.

These problems look set to intensify in the months ahead – and certainly will not be resolved by joining a Pacific trading group.

There are likely also to be shortages in labour availability for some sectors. The result will be slower GDP growth and a higher unemployment rate than would otherwise have pertained, for a period of years until a marked readjustment process has taken place. This should be a salutary lesson for Scotland of the essential need to preserve a positive trading relationship with our major trading partner.

While an independence referendum per se would best be deferred until a return to stable and balanced growth is achieved, the key economic issues related to possible independence do merit serious attention – particularly while so many of us have little if any sympathy with those operating the UK policy regime.

Again three issues stand up as key:-

1. The public finances – however you count the pennies it is evident that public sector spend in Scotland is well above the UK average and higher than could be justified by levels of revenue generated here. Come independence, an adjustment would be required, with spend down and/or tax levels up – at least until an extended period of significantly higher GDP growth had taken Scotland to a new equilibrium.

2. The currency – the option of staying as we are, with ‘Scottish sterling’ backed by the Bank of England, would neither be acceptable to RUK nor perceived by many as ‘real’ independence.

It would take time and an extended period of tight monetary and fiscal policies to get ready for entry to the eurozone; and establishing a standalone currency would again necessitate higher interest rates and tight fiscal policy until market credibility was achieved.

3. Trading with the UK – we come back to the question posed by Andrew Marr to the First Minister a few months back. Can Scotland really expect to be the only country in the EU to be permitted full and free trade with an external nation (RUK)? If not how severe an impact would trade barriers with RUK have on the Scottish economy?

The solution to all of these problems would be for Scotland to achieve accelerated economic growth, with low inflation, for an extended period.

In the interim, pre IndyRef2, let us see if we can achieve that end – via higher productivity and skill enhancement – alongside balancing up.