The SCOTTISH economy will remain subdued “until the fog of Brexit has lifted”, the country’s chief economist has warned.
In his latest State of the Economy report, Gary Gillespie reported business confidence was “subdued”, while households’ expectations for the economy have dropped to their lowest level since 2013.
Whether or not the new prime minister can get the Withdrawal Agreement through the House of Commons head of the October 31 Brexit deadline is “central to the outlook for Scotland’s economy over the next 12 to 24 months”, he added.
The Scottish Government’s chief economic adviser said if that does not happen and the UK is unable to secure a further extension to its membership of the European Union the country risks being pushed into recession, with a “corresponding sharp rise in unemployment”.
While the report noted GDP growth north of the border had strengthened to 0.5% in the first three months of 2019, and the employment rate had risen to a record 75.9%, the chief economist said: “Until the fog of Brexit is lifted, growth in the Scottish and UK economies will remain subdued and potentially more exposed to any downturns in international demand and growth.”
The rise in GDP in the first three months of 2019 was “driven in part by temporary factors”, such as pre-Brexit stockpiling and firms completing orders ahead of the original EU exit date of March 29.
Uncertainty caused by the Brexit process has “impacted business investment, with companies pausing key investment programmes”, the report added.
The chief economist also noted business investment has fallen in both Scotland and the UK “for a number of quarters”, saying that since the 2016 referendum “investment has lagged well behind the growth observed in other G7 countries”.
With the number of foreign direct investment projects in Scotland falling by 19% in 2018, he warned “these trends pose a significant risk for future output growth and productivity if they persist”.
The report stressed: “The short-term outlook for the economy continues to be dominated by Brexit uncertainty and the form any exit takes.”
As well as “subdued business confidence”, consumer confidence in Scotland has “continued to weaken over the past year”.
The report noted: “Consumer sentiment has been negative in Scotland since the EU referendum in 2016 and notably weakened in 2018 and into the start of 2019.
“The latest data for Q1 2019 showed a fourth consecutive quarterly fall in consumer sentiment and the indicator now stands at -9.6, its lowest level since the series began in 2013.
“Looking more broadly at households expectations for the next 12 months, sentiment relating to the performance of the Scottish economy and household finances have both fallen to their lowest levels since the series began in 2013 and have weakened for the past four consecutive quarters.”
Finance Secretary Derek Mackay said while the Scottish economy “continues to perform well”, its stability was “seriously threatened by the UK Government’s EU exit plans which, in whatever form they take, will damage the Scottish economy”.
He said: “As this report highlights, business investment has fallen in Scotland since the EU referendum and investment has lagged well behind the growth of other G7 countries.
“The Scottish Government has been clear and consistent that the best option for the future well-being and prosperity of Scotland is to stay in the European Union, otherwise we will see damage to our economy and the future prospects of the people of Scotland suffering.
“The Scottish Government will continue to do all we can to provide as much reassurance as possible as we face the potential of yet further uncertainty over the UK’s EU exit.”
Source: The National