Sep 04 2020
The COVID-19 (coronavirus) outbreak and associated public health restrictions have caused unprecedented social and economic disruption across the globe throughout 2020, with very few countries immune to its destructive effects. However, as many countries have emerged from the first wave of lockdown measures, the varying extents of the socio-economic impacts of the pandemic are starting to become apparent. Initially, Scotland’s response to the coronavirus outbreak fell largely in line with the rest of the UK, with its lockdown imposed on 23 March, the same day as England. However, Scotland has adopted a more cautious approach to lifting lockdown measures than its neighbour, prompting interesting comparisons regarding the economic decline and initial recovery stage of the two nations.
Pre-coronavirus state of play
Despite following a fairly similar trend, Scotland’s economy has underperformed the wider UK economy in recent years. Published in August 2020, the annual Government Expenditure & Revenue Scotland report found that Scotland’s net fiscal balance including an illustrative geographic share of North Sea revenue was a deficit of 8.6% of GDP in 2019-20, compared with a deficit of 2.5% for the UK. This is partly a result of higher public expenditure compared with the rest of the UK, which had traditionally been made up by oil revenue. However, government revenue from North Sea oil has plunged from almost £11 billion in 2011-12 to £1.2 billion in 2018-19. This has prevented a post-financial crisis improvement in the country’s net fiscal balance, widening the gap between the budget deficits of the Scottish economy and that of the wider UK economy.
Given the restrictive measures imposed across the UK, the coronavirus outbreak has inevitably led to a slump in economic activity in each of the home nations. According to data from the Scottish government, Scotland’s GDP declined by 2.5% in real terms during Q1 2020, compared with an equivalent decline of 2.2% for the UK as a whole. Provisional data estimates that Scottish GDP declined by 19.7% in Q2 2020, compared with a decline of 20.4% for the UK as a whole. These figures point to a broadly similar impact of the coronavirus in Scotland and the wider UK, with all four constituents of the UK thrown into a deep recession as a result of the outbreak. However, Scotland’s GDP figures only include the onshore economy, and therefore do not take into account an expected decline in North Sea Oil and Gas revenue as a result of a slump in oil prices. Based on projections from the Office for Budget Responsibility, the deficits of the UK and Scotland could reach almost 19% and 26-28% of GDP respectively in the current year as a result of significant levels of public spending in response to the pandemic.
As with the wider UK, Scotland’s economic decline has been driven by notable declines in each of the headline sectors, with construction output recording the most significant decline of 41.1% during Q2 2020. The production, construction and services sectors displayed similar trends of a significant decline in output in March and April, followed by a more subdued recovery in activity in May and June, and similarly to the wider UK, more labour-intensive industries have been the worst affected. That being said, agriculture, forestry and fishing output recorded the lowest decline of the four headline sectors over the quarter, a trend that is also reflected by the wider UK economy.
Having followed a broadly similar trajectory over the three months through May 2020, Scotland’s rate of economic recovery in June 2020 lagged slightly behind that of the wider UK, with Scotland and the UK recording GDP growth of 5.7% and 8.7% respectively. This relatively subdued rate of recovery is also displayed by other key economic metrics, with Scotland proving to be the worst performing UK region in terms of output of goods and services across the public sector in both June and July 2020, according to the NatWest UK Regional Purchasing Managers’ Index. Indeed, Scotland was the only UK region to record a decline in output in each of the three months through July 2020, albeit while recording a progressively weaker downturn. This is somewhat unsurprising given the head start that England gave itself with a quicker reopening of the economy, with the Wales and Northern Ireland also falling behind the nine English regions in terms of business activity. Scotland’s retail sector has also lagged behind that of the wider UK, with latest figures from the Scottish Retail Consortium showing an 8.3% year-on-year decline in the value of sales in Scotland in July 2020; this is in contrast with growth of 3.2% for the UK, which represented the second consecutive monthly increase at UK level. Scottish retailers will hope that this is due to a later reopening of stores, with some retailers forced to remain closed until mid-July in Scotland, almost a month later than the reopening of shops in England and three weeks on from the second latest reopening date across Wales and Northern Ireland. However, data from the British Retail Consortium indicated that footfall remained lower in Scotland than in the rest of the UK in July, while the direct and indirect impact of the cancellation of the Edinburgh Fringe Festival in August, which is typically Scotland’s most lucrative sporting or cultural event, is expected to cost the city almost £1 billion, according to the Centre for Economics and Business Research.
Although Scotland has lagged behind the UK in terms of its short-term economic recovery, the question remains as to whether its more cautious approach to reopening the economy will prove beneficial in the longer term. The most significant threat for both the Scottish and wider UK economies is a second wave of coronavirus infections and the reintroduction of widespread lockdown measures. Scotland has not been immune to local lockdown restrictions that have occurred in England in recent weeks and months, with the reintroduction of some lockdown measures in Glasgow, which is considered the powerhouse of the Scottish economy, from 2 September likely to be of particular concern. However, the Scottish government will be hoping that the greater level of caution taken towards lifting lockdown measures leaves the country less susceptible to more detrimental measures. This should provide a degree of optimism among Scottish consumers, and according to economic growth forecasts from KPMG, the Scottish economy is expected to contract by 9.1% in 2020, compared with a UK-wide GDP decline of 10.3%. Meanwhile, measures introduced by the Scottish government to stimulate the economic response to the coronavirus, including measures to boost youth employment, plans to make it easier for SMEs to access public sector funding, and support for new creative work, are expected to spur renewed economic growth in 2021. However, the extent of the economic recovery is dependent on Scotland avoiding a resurgence in coronavirus cases, and even if the country proves successful in doing so, the lingering effects of the coronavirus-induced recession are expected to prevent Scottish GDP from returning to pre-coronavirus levels in the medium term.