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6.8% contraction forecast

Scots economy ‘unable to fully restart until vaccine found’

scottish economy

Activity will remain subdued says KPMG

The Scottish economy is expected to shrink by 6.8% this year and is unlikely to fully restart until a vaccine or effective treatments for the virus are available, according to KPMG UK’s latest quarterly Economic Outlook.

One of four scenarios considered for the timing of the recovery assumes that a vaccine will be available from July 2021, enabling all social distancing measures to be removed and pandemic-related uncertainty to dissipate by the following month.

However, Scotland could start 2021 with another negative shock to the economy due to the end of the transition period with the EU, with gross added value (GVA) contracting at least during the first quarter of the year. Based on the same scenario, the UK’s economy is forecast to contract by 7.2% in 2020, rising by 2.8% in 2021.

Economic recovery next year could be hampered by Brexit. KPMG’s forecasts assume that a deal will be reached by the end of this year and this will enable the UK to trade with the EU with no tariffs or quotas and will cover some services.

However, even without tariffs, some additional trade friction may not be avoided due to the need for customs and other inspections.

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Therefore, exports are expected to fall back at the start of next year despite some recovery in many of Scotland and the rest of the UK’s export markets.

An end to the transition period with no deal, or with a more limited trade deal, would see a much weaker economic recovery next year.

The two Scottish local authorities predicted to be hit hardest over the next year are Aberdeen City and Aberdeenshire, with economic hits of 8.6% and 8.5% respectively. The local authority expected to least impacted is West Lothian, with a predicted 5% economic decline.

Catherine Burnet, Scotland chairman at KPMG UK, said: “Our latest economic modelling highlights the scale of the challenges ahead for Scotland as it faces the most severe economic downturn in modern times, with no clear end to the current crisis.

“Considerable uncertainty remains around the timing of a vaccine which will impact the timing and speed of the recovery, as well as the extent of any permanent damage to the economy.

“That said, there are some tentative signs of a pick-up in activity and we expect to see a partial recovery in the second half of this year as the gradual easing of restrictions brings light to more corners of the economy. However, a full resumption of activity is unlikely until a vaccine or effective treatments for COVID-19 is found.

“The pandemic will leave a lasting mark on the economy. We all need to adjust to a new future, not just to the current recession, and make the most of the hand we’ve been dealt to build something better for us all.

“That could be doing more to help the environment, investing more in our essential workers, or matching our universities with local businesses to improve regional productivity. If we get this right, the future may well be a lot brighter.”

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