Scottish GDP could drop by a third because of COVID-19 lockdown

The Scottish Government's chief economist said that the exact path of economic recovery remained uncertain, as the duration of the lockdown is not known.

The impact of the COVID-19 lockdown on Scotland’s economy could be “unprecedented in scale” leading to a 33 per cent drop in Gross Domestic Product (GDP) and a “scarring effect” of unemployment on communities, the Scottish Government’s chief economist has warned.

In the first State of the Economy report since strict social distancing measures were introduced, chief economist Gary Gillespie looked at the impact on GDP and the labour market as well as possible scenarios for economic recovery.

The report’s findings suggested that the recovery will be slower the longer lockdown goes on, but the report also warned of a “W shaped” recovery, if lockdown was lifted prematurely and this resulted in a second spike in coronavirus infection.

The analysis shows that GDP in Scotland could fall by around 33 per cent during the current period of social distancing, similar to estimates from UK and international bodies such as the Office for Budget Responsibility (OBR) and the Organisation for Economic Co-operation and Development.

Gillespie said the exact path of recovery remained uncertain, as the duration of the lockdown is not known.

He also said there was added uncertainty as the long-term effects of a recession were hard to predict.

Not all sectors would come back immediately, he warned, and the longer the measures were in place, the harder the impact would be on public finances and the less scope there would be for fiscal stimulus in the recovery.

The report illustrated three scenarios for recovery, including a “V shaped” recovery whereby the economy bounces back quickly after the sharp decline associated with social distancing restrictions.

This scenario, Gillespie predicted unemployment could reach 10 per cent, but then return to pre-pandemic levels after around one year, similar to estimates from the OBR.

Alternatively, there could be a “W shaped” recovery, where further economic interventions would be required following a second wave of infections.

In such a scenario, “unemployment could reach higher levels and take perhaps three more years to recover to pre-pandemic levels,” he warned.

Gillespie said the economy would recover, but that “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”.

Economy Secretary Fiona Hyslop said: “Our response to COVID-19 is saving lives, but I am deeply aware that the pandemic is having an economic effect that is already being felt across Scotland.

“The Scottish Government is doing everything we can to support businesses at this very difficult time.

“We want Scotland to recover as quickly as possible from this outbreak, and that includes rebuilding our economy as quickly as is safely possible.

“None of us should be under any illusions about the scale of economic recovery and, as we have said before, no government will have all of those answers.

“That is why we have set up an independent advisory group to provide expert economic advice and this will be crucial to help us deal with the challenge of rebuilding our economy.”