Monthly economic brief: December 2020

GDP growth outlook

The economic outlook remains extremely challenging, with increased restrictions planned for the start of 2021, coinciding with the end of the EU transition period, while the roll out of a vaccine provides the potential to offset some of the downside risks.

• The economic outlook for the global and domestic economy remains extremely uncertain.  The pace at which developments around the pandemic continue to evolve are strongly influencing both the short term outlook and longer term scenarios.
• In the short run, latest business surveys have signalled that business activity has slowed and contracted in the final quarter of 2020 amid the introduction of regional restrictions.  The Office for Budget Responsibility^[23] project UK GDP to fall by 2.7% in Q4 2020.
• However the further tightening of restrictions in December and into the start of 2021 places further downside risks to economic activity for the remainder of 2020 and the first quarter of 2021.  These elements are not captured in the latest UK scenarios.  However the breadth of the restrictions across the UK as a whole, including in cities such as London, which has key economic links across the UK, is likely to have implications for growth across all sectors and regions.
• Further ahead, the roll out of the vaccination programme is a key element for the pace at which economies can grow in 2021 and recover back towards their pre-pandemic levels.  Most forecasters implicitly assume that an effective vaccine will offset some of the downside risks and reduce high levels of economic uncertainty. 
• At a global level, the OECD project world GDP to fall by 4.2% in 2020 before rebounding to 4.2% growth in 2021. However, there is significant variation expected across countries.^[24]
• At a UK level, the latest average of new independent forecasts published by HM Treasury^[25] suggests UK GDP will contract by 11.1% in 2020 before rebounding to 5.4% growth in 2021.

• The Office for Budget Responsibility central forecast suggests UK GDP will return to pre-pandemic levels by Q4 2022, however, if downside risks of further restrictions on activity and expectations for the vaccine don’t materialise, GDP may not return to pre-pandemic levels until the end of 2024. 
• In Scotland, this edition of the monthly brief set out a central scenario in which Scotland’s GDP falls 10.8% in 2020 before growing 6.4% in 2021 and gradually returns to pre-pandemic levels in 2023.  However, this assumes that restrictions are gradually relaxed over the first half of 2021, as a vaccine or other measures limit the spread of the virus.  A much quicker roll out of a vaccination programme could enable GDP to return to pre-crisis levels before 2023 while a slow or ineffective vaccination programme could result in a slower recovery.