By Jeremy Peat

August proved to be yet another month in which the data were broadly encouraging and new forecasts much improved upon their predecessors, but with major uncertainties remaining like storm clouds on the horizon.

For Scotland the key items of economic and financial news were the publication of the latest forecast from the (strictly independent) Scottish Fiscal Commission and the latest fiscal analysis in the Government and Expenditure Review (GERS) for 2020-21.

The SFC’s latest report exemplified the improved outlook perceived by a wide variety of forecasters. In its January report the SFC expected growth of GDP this year of a paltry 2%, with the pre-pandemic level of GDP not being achieved until 2024. How much has changed in a mere seven months. The SFC now forecasts growth in 2021/22 of a massive 10.5%, with the pre-pandemic level of output achieved as early as the second quarter of next year.

The Commission is also much more optimistic regarding unemployment. In the January forecast it expected a peak of unemployment at 7.6% in 2021 Q2. In the latest report the peak is 5.4% in Q3, following the end of the job furlough support scheme.

This implies nearly 60,000 less folk unemployed at the peak.

But of course there are many risks remaining. First of all we cannot know with any degree of certainty that there will not be a necessity to impose further restrictions on economic activity if the level of Covid cases continues to soar and/or some worrying new strain or strains emerge. Such restrictions would result in another significant dip in GDP.

Nor do we know what will transpire when the furlough scheme ends on September 30 – and this really matters as there are still 140,000 workers on furlough in Scotland. If significant numbers of workers are laid off, then as a consequence household incomes and confidence could fall sharply, dragging down retail sales and GDP overall.

It could be argued that many of those laid off as the furlough scheme ends will readily find new jobs.

We know that there record numbers of job vacancies and that a record number of people in the UK moved from unemployment to employment in the second quarter of this year. One consequence of this tight labour market is supply constraints for manufacturers and retailers.

But this does not necessarily mean that those let go when the furlough scheme ends will seamlessly slip into new positions – filling some of the record number of vacancies.

It seems likely that there will be a mismatch both geographically and by sector/skillset between the new jobseekers and the plethora of vacancies.

We must hope that re-training opportunities are available from Government and employers to help those seeking new areas of employment to acquire the required skills. It is no surprise that the CBI is calling upon the Scottish Government to do more on the skill development front.

Inflation and its possible implications also remains a risk. The Consumer Price Index declined unexpectedly from 2.5% in June to 2.0% in July – back in line with the Bank of England’s target.

However, this looks to have been due to temporary factors and an increase in the CPI to 4% around the turn of 2021/2022 is still a distinct possibility. This would be particularly likely if the labour market mismatch referred to above results in a spike in wage inflation.

If inflation were to rise to c.4%, then the Bank’s Monetary Policy Committee would have to give serious consideration to a hike in interest rates, with an inevitable dampening effect on GDP growth, investment and employment.

A tightening of monetary policy via higher interest rates would be especially problematic for all in the economy if accompanied by a sharp tightening of fiscal policy via some combination of higher taxes and lower public expenditure.

What happens next at the UK level regarding tax and spend remains a matter of much conjecture. Similarly in Scotland, where we should know a little more next month when we have forecasts from the UK’s Office for Budget Responsibility to compare with those of the SFC. (The forecasts from OBR and SFC have to be used by the UK and Scottish Governments as the backcloth to their proposals on the public finances.)

The latest GERS report is primarily relevant to the longer term. This shows, noting all caveats and including a geographical share of North Sea oil revenue, a deficit in Scotland in 2020/21 of £36.3billion or 22.4% of GDP. The UK deficit is put at 14.2%.

Inevitably, given Covid, these are all record highs. Also the increase in the deficit in Scotland is, according to the Fraser of Allander Institute, “a little larger than we might have expected” – probably related to the sharp contraction in North Sea activity.

Again as the FAI points out these figures provide a “starting point” for continuing debate as to how the public finances could be managed under independence; and “the challenge of building a model of fiscal sustainability just got harder”.

To an extent this has been acknowledged by the SNP Government, with the First Minister and the Finance and Economy Secretary both calling for more devolved powers to help grow our economy.

But what we have yet to see is how enhanced growth would in practice be achieved and sustained, and how the public finances could be managed within such a context.

An informed debate around this topic is essential ASAP in order to inform any future consideration of independence.