ECONOMIC activity in Scotland is expected to drop by 5 per cent in the first quarter of this year and will not return to pre-pandemic levels until 2024, the Scottish Government's official forecaster has said.

The independent Scottish Fiscal Commission (SFC) warned the coronavirus crisis will have "long-lasting effects on the Scottish economy". 

It came as the criteria for a “Scotland-specific economic shock” were met for the first time, with GDP potentially lagging behind north of the Border.

However the SFC said this is likely down to the difference between its forecast and the Office for Budget Responsibility's UK forecast in November, which predated the current lockdown.

Elsewhere, the SFC's income tax forecast for 2021/22 has fallen by £634 million compared to its previous forecast in February 2020, "primarily because of falls in employment".

It expects the unemployment rate to peak at 7.6% in the second quarter of 2021 once the furlough schemes end.

The SFC also expects that as the vaccination rollout continues and public health restrictions are lifted, the Scottish economy will begin to recover, with GDP growing by 2% over 2021 as a whole and by 7% in 2022. 

But its report said: "Covid-19 will have long-lasting effects on the Scottish economy. 

"We don’t expect Scottish GDP to recover to its pre-Covid-19 level until the start of 2024. 

"Scottish GDP in 2025 will still be 4% below where we expected it to be in our February 2020 forecast."

It forecasts the latest lockdown will reduce economic activity in the first quarter of 2021 by 5%.

The effect on GDP is expected to be less than in the first lockdown because more sectors of the economy, like construction and manufacturing, are staying open.

A Scotland-specific economic shock is triggered when onshore Scottish GDP growth is below 1% in absolute terms on a rolling four-quarter basis, and 1% or more below UK GDP growth over the same period.

As a result of the difference between the SFC's forecast and the OBR's UK forecast, these criteria are set to be met for the first time later this year.

This shock gives the Scottish Government the ability to borrow £300m more and removes limits on the ability to withdraw from reserve funding.

But the SFC report added: "Based on what we observed in 2020, we believe the outlook for Scottish GDP and UK GDP are broadly similar and most of the difference between our forecasts for Scotland and the OBR’s UK forecasts is likely to be accounted for by the fact that the two forecasts were based on different announcements about what health measures would be in place in early 2021. 

"The Scotland-specific economic shock may not be present once the OBR updates its forecasts in March 2021, or once outturn data are available."

Dame Susan Rice, chair of the SFC, said: “The last year has been difficult for us all, and I’m afraid it’s clear the coming year will continue to be tough. 

"With rising unemployment, the pain has also not been shared equally. 

"But we do see the economy gradually recovering as the restrictions are relaxed.

"It’s not an easy time to set a budget as there’s a lot of uncertainty about the pandemic and its impact.

"Unlike the UK Government, the Scottish Government has to balance its budget each year.

"This makes managing the Scottish public finances really hard when the funding from the UK Government is likely to vary greatly through the year.”