Scottish economy set to return to pre-pandemic levels quicker than expected

Scotland’s economy is set to recover to pre-pandemic levels earlier than previously thought but economists are warning of disruption over winter caused by inflation, supply chain shortages and a possible spike in unemployment.

The Fraser of Allander Institute (FAI) has reported strong economic growth in the second quarter of 2021 but said there are significant risks that could see the recovery “flatten off or even go into reverse”.

The Strathclyde University research institute now forecasts economic growth of 6.5% in 2021 and 4.8% in 2022, with the economy returning to pre-pandemic levels by April next year – three months earlier than expected.

Its prediction echoes Scottish Fiscal Commission forecasts that the Scottish economy will grow by 10.5% in the 2021-22 financial year, fuelled by greater household spending.

But both organisations have warned that domestic recruitment difficulties and pressure on international supply chains are pushing the inflation rate upwards.

In its economic commentary, sponsored by accountancy firm Deloitte, the FAI suggests growth could stall if consumer spending is hit by inflation, more shortages or the damage caused by furlough ending on Friday.

Further uncertainty from the planned cancellation of the Universal Credit uplift next month is expected to bring additional financial hardship to around half a million families in Scotland, while labour shortages in numerous sectors increase the threat of increased shortages of goods and add to the risk of more inflation, it adds.

Mairi Spowage, director of the FAI, said: “Following a stronger recovery in economic activity than we were expecting during May and June, and the further easing of restrictions during the summer, we have revised up our outlook for growth.

“However, there are several reasons that growth could stall.

“If new public health restrictions need to be imposed, or if the end of the furlough scheme and the Universal Credit uplift lead to an easing off in consumer spending, or supply chain disruption and shortages continue, the recovery could flatten off or even go into reverse.”

Steve Williams, senior partner at Deloitte in Scotland, said: “While the economy is still feeling the impact of the pandemic, after the initial bounce its recovery has certainly moved into a new phase; one marked by slower, more constrained growth and higher inflation.

“Although it is likely that the global recovery will continue, the situation remains fluid, particularly as government support winds down, and as supply chain issues continue, presenting a risk to growth.”

Looking ahead to the Cop26 conference, the FAI suggests that the current policies are not enough to effectively tackle the climate crisis.

Ms Spowage said: “Few of the Government’s environmental measures are showing the progress that is likely to be needed to achieve long-term environmental outcomes.

“This adds to the fact that almost half of businesses have not set a target to get to net zero.

“It is clear that a real step change in ambition is required in order to achieve Scotland’s world-leading targets. The world waits to see what will be achieved in Glasgow in November.”

Mr Williams said: “With greater focus than ever on the climate crisis, businesses must look at the associated opportunities and risks that come with this. Ultimately, a bold, entrepreneurial approach will need to be taken by business leaders, who will have to employ creativity and innovation at scale.

“This will be supported by new ways of living, working and consumption, all of which will be required for the growth of a greener economy as we recover and thrive following the pandemic.”