The coronavirus outbreak has already led to a sharp economic downturn in Scotland, one that will undoubtedly change the shape of our economy in the long-run.
The virus outbreak represents an ‘unprecedented shock’ to the global economy that will trigger a recession, but the collective efforts of business and policymakers are to ensure that this is – as much as possible – a ‘v-shaped’ recession, with activity picking up once the public health crisis passes.
Professor Graeme Roy, Director of the Fraser of Allander Institute, said: “The large-scale mothballing of our economy in response to the public health emergency is unlike anything we have seen since World War II.
“Businesses and policymakers always knew that a global pandemic represented a major risk to our highly integrated global economy. But the pace at which this crisis has escalated has caught many off-guard.
“Assuming that the public health emergency will pass in the coming months, the hope of many is that that the economy should come out the other side with only a limited hit to its long-term productive capacity.
But this is looking increasingly overly optimistic. The scale of the shutdown in our economy is so large it will take months, if not years, to recover, Key now will be ensuring that long-term scarring effects of any recession can be mitigated as much as possible.
The economy that emerges from this, from the shops on our high street through to day-to-day working practices, is likely to look quite different.
Different sectoral impacts
Particularly exposed are services relying upon ‘social spending’, such as the tourism and hospitality sector, including, hotels, cafes and restaurants. This may have a disproportionate impact upon rural communities in Scotland, where smaller businesses and high numbers of self-employed people are prevalent.
Mairi Spowage, Deputy Director of the Institute, says: “Whilst there remain issues to be worked through, including how some of the government support schemes will operate in practice, so far the policy response has been well received. But things are clearly escalating quickly and changing day-by-day.
“The current situation – almost unthinkable just a few weeks ago – of the State stepping in to support wages will not only help families and businesses at this crucial time, but will act as an important bridge to support the recovery when it comes.
“As with all previous recessions, some individuals, businesses and local communities will be impacted more than others. Of particular concern – at list initially – were businesses relying upon so-called ‘social spending’, such as tourism businesses, cafes, restaurants and retail. These sectors will look very different in the future.
The tourism – and wider entertainment – sector is vital for Scotland, particularly at this time of year. Around 13% of the Scottish economy and 19% of employment is made up of such sectors, including retail, hotels and restaurants.
“But with the much wider shutdown in our economy roll-out in recent days, all sectors of our economy are going to be impacted in a major way.”
John Macintosh, Tax Partner at Deloitte, said: “COVID-19 is a truly global crisis and its economic implications will be felt by all. Businesses across Scotland, the UK, and the rest of the world are, for one of the first times in history, facing many of the same challenges.
“In the face of crises, there are steps businesses can take to protect their future. Leaders should communicate openly with their people to reassure them the business is acting in their best interests. They should also listen to the needs and worries of their customers. This will be more difficult for some than others, but it provides an opportunity to understand what services your customers need now and what will help them and society in the long term.
“Finally, protect your business. Many companies are facing weeks, if not months, of difficult trading conditions. However we will get through this and if there was ever a time for the business community to pull together, to share skills, knowledge and resources, it is now.”
Jobs and income
The report also highlights the impact on jobs and household incomes, with many families lacking sufficient savings to cover their bills for an extended period of time.
The Institute points out, for example, that only 42% of Scottish households in the bottom income decile would be able to cover one month of their regular income from savings. Around three quarters of households in the bottom decile would not have a sufficient buffer if they had to forgo regular income for 6 months.
The Institute raises several questions about the economy that will emerge from the crisis, including:
- How will businesses survive through the crisis, and how many will be changed (or lost) forever?
- What might be the long-term implications for economic policy and the social contract between the State and business?
- How might current events impact our ability to cope with the major structural changes we know are coming in the years ahead (such as climate change)?
- What lessons might we learn to combat future health emergencies, both here and abroad and how that might influence our attitudes to globalisation and risk?
- To what extent might future ways of doing business change? And might this be a catalyst for a more considered view of how our economy interacts with wellbeing and tackles inequalities?
- And might this be the circuit breaker that we need to move to more flexible (and online) ways of working?
Professor Roy said: “The economy that will emerge from this will look quite different and not just because many businesses may struggle to survive.
“How individual sectors and businesses will adapt over the next few months – from retail through to universities – will change behaviours forever.
“The government’s response to the public health crisis is arguably the first step on a new social partnership between the State and business, perhaps unlocking a much broader conversation about inequalities and sharing the proceeds of growth more evenly across society.”
The Economic Commentary can be accessed here.
The immediate outlook
With so much uncertainty – about the spread of the virus, the impact it might have, the timing of when to expect the worst effects, and the policy response – any exact ‘forecast’ of the scale of economic impact is nigh-on-impossible.
Instead, it’s much more important to understand the channels through which we can expect to see our economy impacted. One thing we do know, however, is that even just as a result of the public health response already – with major sporting events postponed, mass gatherings prohibited etc. – and warnings that up to a fifth of working age people could be off work at any one time, we should expect for a ‘significant impact’ on the economy.
But what else do we know?
A first issue is timing. At a macro level, some effects will be temporary, e.g. time taken off sick, or holidays postponed, with a likely bounce-back further down the line. The gumming-up of supply-chains may also be time-limited for many. Once the immediate crisis subsides, firms seek to replenish stocks and meet delayed demand.
But the worry is if these last for a relatively long-period of time. This combined with a more global recession/slowdown, raises the potential for more permanent scarring.
A second important issue is that the impacts of the pandemic will vary by firm, sector and market-place. The ability of each business to flex over time to cope with disruption will be crucial.
So, whilst the underlying growth potential of our economy may recover, the make-up of the economy that emerges may look quite different.
Most exposed are likely to be businesses relying upon ‘social spending’ – i.e. restaurants, retail and entertainment firms. Tourism– particularly firms relying upon overnight stays (such as many small hotels, guest houses and tour operators) – are also likely to be in the front line of any sudden drop in demand. Again, whilst many of the impacts will be temporary (people will take holidays in the future), a collapse in demand even just for a short time will put a significant strain on many businesses.
Also likely to be highly exposed will be individuals and businesses who have little buffer to cope with any sharp slowdown. Small businesses in particular, may find themselves struggling with lost demand, at the same time as having to foot the bill for sick pay for those who fall ill or self-isolate. Most small businesses operate with limited cash reserves (perhaps as little as a few weeks) so cash-flow will be paramount.
For individuals who are off work, many will have recourse to occupational sick pay schemes, but those on lower wages are more likely to have to rely on the relatively ungenerous statutory sick pay (SSP) scheme. Self-employed – and gig economy – workers have far less protections.
So whilst the immediate impact might be ‘temporary’, the objective for economic policymakers will to make sure that the scale of the temporary shock isn’t sufficient to cause longer-term damage to the economy.
The policy response
Policymakers have already moved swiftly.
Key will be ensuring that there is sufficient support in place to help firms get over what is likely to be an effective partial shut-down of our economy until things return to normal.
The Bank of England has already cut interest rates to stimulate demand. More interventions are likely, particularly to keep liquidity flowing around the economic system as a whole. (Ed: The UK Chancellor unveiled a £332bn package of support via loans on 17/03).
Last week’s Budget contained a range of measures. Those who are affected directly, including both diagnosed individuals and those self-isolating in line with government advice, will be eligible for SSP from day one if they are eligible.
For those not eligible there has been a relaxation on some of the rules on Universal Credit. It should also be easier for anyone to access wider support as a result of coronavirus, including relaxation of the requirement to attend a jobcentre if they have been advised to self-isolate.
These measures work through reserved policy channels and will be available in Scotland.
Whilst a good start, it is likely that the government will already be thinking about what more it could do, particularly if the impact lasts for longer, and we want to incentivise people to stay at home and not work if they have milder symptoms.
For example, SSP is equivalent to around £95 a week.
Someone working 35 hours on minimum wage would see their income drop by two thirds. And if people are expected to go on to Universal Credit, for a single adult that’s around £75 a week so they’re looking at an even bigger drop – and a potential delay in getting the money. Some people may find themselves in a difficult financial predicament and feel they have no choice but to carry on working (putting at risk attempts to curtail the spread of the virus).
Alongside support for individuals, the Budget contained measures to support small businesses.
To mitigate impacts on costs, small businesses will be able to claim back up to two weeks of sick pay. Again, as this is reserved, the measure will extend to Scottish firms. A new temporary loan scheme is to be launched, offering bank loans of up to £1.2m.
On paper, these look sensible measures.
But one challenge will be ensuring that businesses, many of which will have little interaction with such schemes in the past and will be nervous about their future, get access to the right support as soon as possible.
The Scottish Government announced on Saturday a range of business rates support measures. This included an £80m fund to provide grants of at least £3,000 to small businesses in sectors facing the worst economic impact of COVID-19 and targeted reliefs for retail, hospitality and leisure sectors with a rateable value of less than £69,000.
What is clear is that both governments are prepared to ‘do what it takes’ to support the economy through the crisis.
There is support out there for businesses, and businesses should reach out as soon as possible to government agencies, and their banks, for help and to discuss the range of schemes on offer.
Much of the support is – quite rightly – targeted at the sectors in the front-line (such as retail and hospitality). But the nature of the situation faced is that there will be externalities everywhere. And with some businesses facing a near complete shutdown of demand for a period of time, it remains to be seen if these measures will be enough.
With this in mind, there will be an important onus not just on policymakers, but all of us as consumers, to play a role in supporting such businesses through tough times. Shopping locally, visiting local restaurants and supporting our local tourism industry will all make a difference.
And of course, by following public health advice we too have an important role to play in ensuring that the worst effects of the pandemic are mitigated as best as possible. Getting through the next few weeks and months safely and healthy will ultimately be the best thing we can all do for our health and the economy.
First published by the Fraser of Allander Institute
Further reading: Coronavirus and household incomes, Frantisek Brosek, FAI; Supporting people through the economic impact, FAI; Implications of school closures, FAI; Policy measures in and for Scotland, FAI; Coronavirus and end of globalisation, David Jamieson, Source;
No V-shaped recession, we’re in for the long haul before recovery, FAI update, 02/04/2020:
Image by Andrew Parsons/10 Downing St CC BY-NC-ND 2.0