The route to economic recovery in Scotland

Scotland’s economy may not recover until 2023 was the recent stark warning from Scotland’s chief economist, Gary Gillespie, who noted it would take some time for output to bounce back to pre-COVID levels.

Around 19 per cent of companies are currently closed and he predicted that unemployment could increase to over 10 per cent this year.

Meanwhile, a survey by the Federation of Small Businesses (FSB) found that 35 per cent of small businesses that have closed due to coronavirus think they might never reopen and a survey by the Institute of Directors last month found that a quarter of UK businesses that have furloughed staff said they cannot afford to contribute anything to the cost of furlough between August and October, leading to concerns of significant job losses as the scheme tapers off.

The Fraser of Allander Insitute estimated that if lockdown restrictions continued for a three-month period, Scottish GDP could contract by around 20-25 per cent and the chief economist has warned it could shrink by a third due to the outbreak.

While no one could be under any misapprehension that things were going well for the economy, with April the worst performing month on record, this makes clear just how far we have to go.

And things will be worse for particular sectors that will continue to be closed or curtailed for the foreseeable future.

Coronavirus is not good news for any sector.

The Scottish Food and Drink Federation reports that Q1 exports of food and drink fell by over £700m, a drop of 12.7 per cent compared to the same period in 2019, with sales to EU countries the hardest hit, where the total value fell by 17.4 per cent, largely driven by the impact of COVID-19, including the closure of hospitality and travel sectors, which meant a loss of sales into restaurants, cafés and bars across Europe.

Declines were reported among the UK’s top ten products, with whisky, chocolate, cheese, salmon and gin seeing export value drops of over £20m in the first three months of 2020.

Dominic Goudie, head of international trade for the FDF, said: “Manufacturers and the other hidden heroes working across the supply chain have ensured continued access to essential food and drink for UK shoppers during this crisis.

“But we can now see how COVID-19 has impacted valuable overseas sales of UK food and drink that were worth over £23 billion in 2019.”

Not surprisingly, retail also saw a huge slump, with non-food sales declining by over 70 per cent in April.

The £11bn Scottish tourism industry is one of the sectors most affected, seeing not just a drop in demand but zero demand during lockdown and the physical distancing restrictions make it likely that it will be severely affected throughout this year.

Internationally, the OECD has estimated declines of 45 per cent to 70 per cent in the international tourism economy in 2020, while the World Travel and Tourism Council has predicted one million tourism-related job losses in the UK.

The Scottish Tourism Emergency Response Group COVID-19 National Action Plan, published in May, describes coronavirus as the “biggest challenge ever” for the industry and predicts it will take time and significant support for businesses to restart their operations.

In April the Fraser of Allander Institute predicted that a three-month lockdown could lead to a 40-50 per cent contraction in the construction sector, which generates £21.5bn in GDP, around 10 per cent of Scotland’s GVA and employs 170,000 people, equating to 10 per cent of Scottish jobs.

Some essential construction projects have continued during lockdown and others due to begin resuming with social distancing in place during phase one of the Scottish Government’s route map.

But the Construction Industry Coronavirus Forum has warned that payment and cashflow were already an issue for the sector prior to COVID-19 and will be even more of a problem for some businesses restarting.

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Manufacturing accounts for over 180,000 jobs and contributes over half of Scottish exports and business expenditure on research and development.

Essential manufacturing, particularly for the health sector, has been continuing throughout the coronavirus outbreak, and non-essential manufacturing is also set to restart in phase two of the Scottish Government’s route map, but the Fraser of Allander Institute has estimated that a three-month lockdown would mean 25-30 per cent contraction of the production sector, the majority of which is manufacturing.

Oil and gas, too, has had serious problems, with the increase in home energy use not making up the drop in consumption from transport and industry.

The leading representative body for the UK’s offshore oil and gas industry, Oil and Gas UK, has warned that up to 30,000 jobs could be lost in the sector as companies deal with both the fallout from the coronavirus pandemic along with a 20-year low in oil prices and a 14-year low for gas.

Last week BP announced that 10,000 out of 70,000 jobs are to go globally.

OGUK chief executive Deirdre Michie said: “Like so many industries, our members have been profoundly impacted by COVID-19. With historic low oil and gas prices coming so soon after one of the most severe downturns our sector has experienced, these findings confirm an especially bleak outlook for the UK’s oil and gas industry.

“If the UK is to maintain its supply of domestic energy, protect jobs and build the critical infrastructure it needs to transition to a net zero future, ours is an industry worth fighting for.”

The tech sector has been less affected than some others, but a recent survey by industry body ScotlandIS found that 62 per cent of respondents were pessimistic or very pessimistic about the rest of 2020, with expected challenges including attracting new business, cashflow and staff health and wellbeing, although a third of tech businesses also thought there could be new business opportunities in areas such as remote working, cloud computing and digital health solutions.

But while financial support has been made available from both the UK and Scottish governments to try to tide different sectors through the crisis, as we look beyond just responding to the crisis into recovery, the global pandemic has provoked calls not just to bring back what was there before, but to take the opportunity to fix some of what is not working and create something better.

North Ayrshire Council has promised to take a radical approach to economic recovery through community wealth building, which it dubs “the most radical and transformational economic concept in generations” and a “game changer”.

Community wealth building is an economic model that involves large ‘anchor’ organisations in the area, such as councils, hospitals, housing associations and colleges and universities, using their purchasing power to buy from small and medium-sized businesses in the local community.

It also encourages more local involvement in the economy through, for example, the creation of cooperatives and using publicly owned land for the common good.

Community wealth building has proved successful in Preston, which adopted the model in 2011 and saw unemployment halve and the city move out of the top 20 most deprived areas.

North Ayrshire was already planning a move to community wealth building before coronavirus, but now says it will use it as part of the region’s recovery from the crisis.

Councillor Joe Cullinane, leader of North Ayrshire Council, said: “The current approach to the economy has left behind certain places and people and we must ensure that we have a recovery that is inclusive and tackles current inequalities. We also need to create an economy that is more resilient and sustainable, and ensure North Ayrshire is ready to deal with future challenges, including the climate emergency.”

While North Ayrshire is shaping practical plans, there have also been calls to rethink the way we consider the whole economy into one that focuses on wellbeing and quality of life rather than GDP.

The Scottish Government was already committed to the idea of a wellbeing economy, which measures success in terms of, for example, levels of poverty, quality of housing or reducing health inequalities and takes into account environmental sustainability rather than just monetary output, but some want to see more progress as part of the post-coronavirus recovery.

Over 80 Scottish organisations have written a joint letter to the First Minister calling on the Scottish Government to commit to a “just and green recovery” after COVID-19.

The letter says: “The recovery from coronavirus is a rare chance to markedly accelerate the repurposing of government away from the prioritisation of economic growth and towards goals of wellbeing and sustainability, ending inequality and environmental destruction. This is a time for system change.”

They list a number of practical measures they want to see taken, including expanding public ownership of public services such as social care, strengthening the NHS and cradle-to-grave education, creating zero-carbon social and cooperative housing instead of buy-to-let, new funds and new jobs to transform the economy to meet Scotland’s share of climate emissions reductions and the introduction fundamental human rights into Scots law so that safety nets are always in place for the most vulnerable.

The letter says: “Decisions made in times of crisis have long-lasting consequences. After the 2008 financial crisis, inequality grew and climate emissions spiralled. We want to see this moment seized for the common good, not repeat the mistakes of the past.”

In a similar vein, the think tank Common Weal recently published a report calling for the creation of a ‘resilient economy’, which it defines as “the ability of a nation to keep providing a good life for its citizens whatever the economy, the world and the environment throws at them”.

It centres on everyone having enough to live on, production rather than finance, and responsible use of resources.

Among the principles that it advocates are that the economy should be based on sufficiency and security; that outputs should be useful; that it should be non-extractive (meaning that money is not taken by shareholders and invested abroad); that it is definancialised: not based around debt and rent, property and financial services; economically democratic; regenerative in terms of the environment; circular and shared; designed in terms of creating the conditions for success; equalised; diverse and decentralised; and better than what we have now.

The report explains: “Scotland is in a particularly strong position to achieve a resilient economy.

“It is should not be read as isolationist or selfish, and nor is it an unrealistic demand for self-sufficiency.

“It is about using your national resources first (and responsibly) before you start relying on (and thus draining) the resources of other nations.

“It is about stewarding those resources really well so you don’t need to rely on importing resources all the time and you don’t need to mitigate the negative impacts of disposing of resources that you shouldn’t be disposing off.

“It is about preventing the constant extraction of wealth by corporations who take out more than they put back in and prioritising reinvesting a nation’s wealth back into its own economy – for the sake of itself and everyone else’s nations.”

But some have warned of losing sight of the need for economic recovery in the desire for change. Writing in The Herald, Professor Graeme Roy of the Fraser of Allander Institute said: “It is only natural that some discussion has turned to imagining a better long-term future, with catchy phrases such as ‘build back better’.

“This is all well and good. But we cannot lose sight of the seriousness or the urgency of the situation now.

“Helping get our economy get back up off the ground, safely and securely, will be crucial for our long-term prosperity.”

He noted that the importance of a prosperous economy for our collective wellbeing “cannot be overestimated”.

Whichever model is chosen, it looks like a long, hard slog back.

Holyrood will be exploring many of these issues around economic recovery in a series of multimedia events and features over the next six months in ‘Scotland: The Recovery’.