RECESSION in Scotland is now “highly possible" and unemployment likely to climb in the wake of the Brexit vote, a leading think-tank has warned.
The Fraser of Allander Institute, a research unit of Strathclyde University, also predicts today that economic growth in Scotland will now be much weaker than it would have been otherwise, describing the outlook as “much more pessimistic”.
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Although it believes any recession is likely be brief, it has warned the picture could turn out even worse than predicted if the European Union exit negotiations fail to make early progress.
Fraser of Allander declined to be drawn into the Scottish independence debate but its forecasts around the detrimental impact of Brexit are likely to provide ammunition for those arguing for Scotland to remain in the EU.
With First Minister Nicola Sturgeon having insisted a second independence referendum is now "highly likely", the think tank said the Scottish Government would "in time" be required to "clarify its own plans for the constitution to avoid adding to the existing uncertainty".
Addressing the impact of Brexit, the Fraser of Allander report said. “The costs of the UK leaving the EU on Scotland’s economy are likely to be structural and long-lasting, with any benefits at best still undetermined and highly uncertain.”
Finance Secretary Derek Mackay said the report stresses the need for Prime Minister Theresa May to abandon the government's "austerity policies" to reduce the short-term economic impact.
He said: "The likely consequences to Scotland's economy of leaving the EU are damaging enough - but the UK Government's complete failure to even plan for the possibility of a Brexit vote has only added to the tremendous uncertainty that business and investors are feeling at the moment.
"The Scottish economy has remained resilient in the face of external challenges over the last 18 months.
"Growth for 2015, at 2.1 per cent, was close to trend and despite challenging labour market conditions during this period, both unemployment and employment have remained fairly stable, with the most recent data showing slight improvements in headline figures."
Shortly before the UK voted to leave the EU in June, the think tank envisioned that unemployment would fall in Scotland.
It is now warning of a significant rise, anticipating that unemployment on the International Labour Organisation (ILO) measure will climb from by almost 15,000 to 188,250 in 2017. This represents a 0.5 percentage-point rise in the ILO unemployment rate to seven per cent in 2017.
Fraser of Allander is now forecasting growth of only 0.5 per cent over 2017 as a whole, rather than the 1.9 per cent expansion it projected last month before the referendum. It has cut its forecast of expansion this year from 1.4 per cent to 0.9 per cent, even though it sees some short-term benefits to exports from a weak pound, and reduced its growth projection for 2018 from two per cent to just 0.7 per cent.
It has cut its growth forecasts significantly for each of the Scottish services, production, and construction sectors in every year covered by its forecast because of the impact of the Brexit vote.
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Graeme Roy, director of Fraser of Allander, highlighted the danger, given growth was projected to be so low, of Scotland suffering the two consecutive quarters of declining economic output that would constitute technical recession.
He said: “On balance, we think we will still have growth over the next three years. It is a substantial revision down in growth. It is so close to zero that a technical recession is highly possible, particularly when we have had growth of zero in Q1.”
The think-tank highlighted the likelihood that the decision to leave the EU would hit trade and investment, while citing the shorter-term detrimental impact of uncertainty and “financial volatility”.
And it warned: “Should negotiations with the EU start off poorly and/or the current uncertainty builds into something more akin to a crisis, then the risk of a more sustained slowdown will rise.”
Mr Roy said: “The combination of economic and policy uncertainty, coupled with the longer-term structural consequences for trade and investment from leaving the EU, make the outlook much more pessimistic than before.
“Given Scotland’s fragile economic performance over the past 18 months, the impact of the EU referendum result is exactly what the Scottish economy did not need.”
He added: “The top priority has to be retaining access to the single market which will help mitigate some of the most damaging effects on investment, trade, productivity and jobs. Whether or not this can be achieved without freedom of movement is highly uncertain.”
Fraser of Allander said that, while the risks were on the downside, it was important not to overstate them. It added that exiting the EU was materially different from the financial crisis of 2008 and 2009, “where the global systemic effects of the crisis were much larger”.
Figures published yesterday showed the UK economy grew by a faster-than-expected 0.6 per cent in the three months to June. However, the EY ITEM Club think-tank warned this was likely to be the “last hurrah” before the economy enters a “softer and more turbulent period”, citing the Brexit impact.
Responding to the latest Economic Commentary from the Fraser of Allander Institute published today (Thursday), Cabinet Secretary for Finance and the Constitution Derek Mackay said:
“This report is another deeply concerning assessment of the consequences of the EU referendum result, and how it threatens to undermine all of the recent positive signs in Scotland’s economic outlook.
“The likely consequences to Scotland’s economy of leaving the EU are damaging enough – but the UK Government’s complete failure to even plan for the possibility of a Brexit vote has only added to the tremendous uncertainty that business and investors are feeling at the moment.
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“The Scottish economy has remained resilient in the face of external challenges over the last 18 months. Growth for 2015, at 2.1 per cent was close to trend and despite challenging labour market conditions during this period, both unemployment and employment have remained fairly stable, with the most recent data showing slight improvements in headline figures.
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