Coronavirus in Scotland: SNP Government warns economy could shrink by a third

Even if the lockdown is lifted by the summer, GDP could be down 12% over the year as a whole, three times the loss of Scottish GDP caused by the 2008 financial crash. 

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The finding is similar to other grim forecasts from the UK’s Office of Budget Responsibility and the OECD.

Economy Secretary Fiona Hyslop said she was “deeply aware” of the impact that the lockdown was having on the economy, but it was needed to save lives.

Labour said the crisis must not be followed by another decade of austerity.

The report, by chief economist Dr Gary Gillespie, also predicted the shutdown would hit workers under 25 hardest as they are most likely to work in retail, hospitality and tourism.

It says the UK and Scottish economy have already taken their biggest hit in over 20 years, with the speed of the recovery linked to the duration of the lockdown.

It warns the impacts will grow in severity with time, and a prolonged lockdown could result in persistent “structural” damage to the economy.

It says: “The Covid-19 pandemic is a health crisis that has now become an economic crisis. 

“The priority has been to protect public health with social distancing measures quickly introduced to contain the spread of Covid-19. 

“This has necessitated the shutdown of economic activity in many parts of the Scottish economy and we should expect to see economic output fall by around a third during the current period of social distancing. 

“It is important however to recognise that this is no ordinary economic downturn – many productive, profitable and sustainable businesses have been required to temporarily close bringing immediate financial stress. 

“The collapse in economic activity is also steeper and faster than in previous downturns and it has similarly impacted our major trading partners. The latter means many of our external markets both for goods and supplies are also impacted.” 

It goes on: “Our Covid-19 scenario assumes that the social distancing measures introduced during March last for three months, before being gradually eased over the following quarter.

“Using this scenario, GDP is projected to fall by 33% over 3-months. 

“This is based on a 10% fall in March followed by a 25% fall in April, with no further change until GDP begins to increase in July.”

However officials admit the “illustrative projection” is not a forecast of the most likely track for GDP this year, as this will depend on what parts of the economy rebound and when.

“We have not yet factored in any specific longer-term or permanent reduction in capacity for any sector,” they add.

On jobs, the report says the impact of the UK Government’s Job Retention Scheme paying 80% of furloughed staff wages is “so far unknown”.

It says: “Scottish Government analysis shows the shutdown will hit younger workers the hardest as employees aged under 25 are more likely to work in a sector that is now shut down. Women are also more likely to work in a sector that has shut down than men.

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“Usually when the economy contracts, unemployment rises with a lag of around 3 to 6 months. In the current crisis, however, the near shutdown of many sectors of the economy means that we are witnessing an immediate and sharp rise in job losses,” it says. 

Looking ahead, it adds: “The economy will recover from the current impacts of Covid-19, but the shape and speed of adjustment are uncertain. 

“Although social distancing measures are expected to be temporary in nature, there is potential for even short term measures to have long lasting impacts. 

“The economic impacts of social distancing are not linear - the impacts will grow more than proportionally to the length of time the measures are in place. 

“This is because the economic impact will start to become more structural.

“Even temporary or mild recessions can have persistent impacts on the economy. 

“Some of the business base will be lost and this, combined with jobs losses, will reduce the overall capacity of the economy. 

“A mismatch between the skills demanded by firms and those recently made unemployed can mean that it takes time to match jobs with the skillsets available, or for workers to re-train. 

“After the global financial crisis it took eight years for Scottish unemployment to return to pre-crisis levels - an example of how persistent high unemployment rates can be.”

Economy Secretary Fiona Hyslop said: “Our response to Covid-19 is saving lives, but I am deeply aware that the pandemic is having an economic effect that is already being felt across Scotland. The Scottish Government is doing everything we can to support businesses at this very difficult time.

“We want Scotland to recover as quickly as possible from this outbreak, and that includes rebuilding our economy as quickly as is safely possible.

“None of us should be under any illusions about the scale of economic recovery and, as we have said before, no government will have all of those answers.

“That is why we have set up an independent advisory group to provide expert economic advice and this will be crucial to help us deal with the challenge of rebuilding our economy.”

Scottish Labour Leader Richard Leonard said: “This report, alongside others including the report from the OBR published last week, makes clear both the impact to the Scottish economy so far, and the economic ramifications that the virus will have for many years to come. It is clear that a plan of action is required with regards to the future of our economy.

“The Scottish Government must work with trade unions and industry to put together an economic strategy that will help plan our way through and out of this economic crash. We cannot have another decade of austerity.”