State of the economy: February 2020

Overview

The recent performance of the Scottish (and UK) economy has been dominated by Brexit, particularly during 2019, with uncertainty impacting business investment and materially impacting on the shape and pattern of growth. Combined with a weaker external environment for trade, growth for 2019 has been positive but significantly below trend.

As the UK formally exited the EU in January 2020 and entered the transition period, the immediate risk of a no-deal Brexit has been removed this year, but uncertainty remains a live issue, particularly for sectors of the economy reliant on new trade agreements to ensure continued (frictionless) market access to the EU from 1st January 2021.

Therefore growth this year for Scotland is likely to follow a similar pattern to the last couple of years, but may strengthen as business sentiment and investment returns, in part, from the recent low levels and combined with stronger public investment and spending that may support stronger economic activity. This edition of the State of the Economy more broadly considers the potential short term economic impacts during the Brexit transition phase, with a shortened transition period to prepare and adjust for a new EU relationship (11 months rather than the 2 years originally envisaged).

However, the outlook for 2021 and beyond is crucially dependent on the shape of any future EU trade deal and the impact of increasing trade frictions as businesses adjust to the additional requirements to trade, both in terms of costs and access. This is reflected in the updated forecasts from the Bank of England for next year and beyond and may manifest later this year if uncertainty drives business stockpiling as we approach the 31st December 2020 deadline.

The labour market in Scotland continued to perform strongly by historical standards through 2019, however employment levels fell back a little and there are signs that earnings growth may be softening. Consumer confidence, which as we report in our sentiment index, has been negative for the outlook for the economy since mid-2016. However, consumer spending had largely held up, supported by high levels of employment, but there were signs in 2019 that this may have leaked into weaker retail sales and therefore household sentiment and confidence will remain important for the economy through 2020.

The official and independent forecasts for the Scottish economy suggest growth of around 1 per cent in 2020, rising slightly over the next few years, which is broadly in line with recent annual growth in productivity. As noted, this may be stronger than 2019 but is likely to remain below trend as the economy transitions to whatever new trade arrangements materialise for 2021 and beyond.

Finally, the external environment also remains challenging. While there are signs that global growth and trade conditions may be stabilising, they continue to present risks for the coming year. The future economic outlook will therefore hinge both on the broader external environment as well as the nature of the UKs future trading relationships. This is at a time when the economy is transitioning for other reasons - primarily around the global climate emergency and the potential for a 4^th industrial revolution.