State of the economy: April 2020

Overview

The COVID-19 pandemic is a health crisis that has now become an economic crisis. The priority has been to protect public health with social distancing measures quickly introduced to contain the spread of COVID-19. This has necessitated the shutdown of economic activity in many parts of the Scottish economy and we should expect to see economic output fall by around a third during the current period of social distancing.

It is important however to recognise that this is no ordinary economic downturn - many productive, profitable and sustainable businesses have been required to temporarily close bringing immediate financial stress. The policy response to the pandemic has also been unprecedented with a combination of fiscal, monetary and macro-prudential measures to maintain cashflow, incomes, wages and employment across the economy - reflecting both the indiscriminate nature of the crisis and the need to protect productive capacity.

The collapse in economic activity is also steeper and faster than in previous downturns and it has similarly impacted our major trading partners. The latter means many of our external markets both for goods and supplies are also impacted. The sudden cessation of economic activity has focussed the economic policy response on maintaining productive capacity, which in many cases has meant supporting temporarily closed businesses.

Our analysis suggests that there could be a 33% fall in GDP during the current period of social distancing. This mirrors the findings from business surveys in March and is similar to the estimates from the OECD, OBR etc. on the scale of the impact on GDP.

These figures are unprecedented in scale but so is the nature of this crisis and the policy response. Our analysis highlights the economic damage of a scenario where social distancing measures are lifted and then reintroduced, with the potential for a 'W' shaped recovery. As such, the path of the recovery remains uncertain for several reasons.

Firstly, as business and society reopens we will see a reversal of the output contraction for many parts of the domestic economy. However, not all sectors will come back immediately as external demand, consumer tastes, and business models will have changed significantly. This will present challenges and opportunities for different segments of the business base reflecting their exposure to different economic channels - both external and domestic.

Secondly, we will continue to lose productive capacity as the restrictions in economic activity continue and this will lengthen the recovery period. This is mirrored in the labour market as we see significant rise in unemployment and the scarring effects that has on individuals and communities.

Thirdly, the longer the measures are in place, the harder the impact will be on the public finances and the less scope there will be for a fiscal stimulus in the recovery, with a greater risk of wider economic contagion.

Finally, the economy will recover but the path and speed of recovery will mirror our success in managing the health crisis and will require careful planning and management of economic activity so that we can operate in a different but productive manner.