Covid-19 has become an 'economic crisis' says chief economist

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‘Covid-19 has created an economic crisis’

The chief economist at the Scottish government says that the current lockdown restrictions are cutting output from the economy by a third.

In his latest 'State of the economy' update, Gary Gillespie says Covid-19 has now become an economic crisis.

Dr Gillespie warned that sustained action to squash the spread of infection will have long-lasting "scarring" effects on the economy.

These will include the loss of businesses and unemployment, he said.

V-shaped recovery

The Scottish government analysis said that the downturn in economic output began in March, continued into April, and it is assumed that it will not pick up until at least July.

Dr Gillespie said the outlook could be affected by lifting of restrictions on social distancing, and later re-imposing them if infection rises. This could move from the hoped-for 'V-shaped recovery' - sharply down and sharply back up again - to a 'W-shaped' one, with a second decline.

The chief economist's update highlights the risk to young people, aged under 25, who are disproportionately employed in the worst affected sectors - retail, hospitality and tourism.

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Tourism is one of the areas that will remain badly affected

The analysis reflects a recent report by the OECD organisation, which monitors developed economies, saying that international tourism, globally, will be down by 45% to 70% this year, and it may take years to recover. Domestic tourism will be important, but is not expected to make up for it.

Tourism is within the 'public-facing' parts of the private sector economy, which are most at risk from sustained constraints on social contact. It is estimated that accounts for 22% of the economy, with 144,000 businesses and 920,000 jobs.

Dr Gillespie's report, published independently of Scottish government ministers, also highlighted the higher risk of economic harm to people in lower-skilled jobs, with roles which are less adaptable to working form home.

Unemployment usually follows three to six months after an economic downturn, but in this case, it started to rise immediately. About 110,000 Scots have applied for Universal Credit in recent weeks.

Consumer confidence

Scottish government modelling of the impact of the economic crisis, with a 33% drop in output, mirrors recent business surveys and is in line with work by the UK's Office for Budget Responsibility, which last week estimated that UK economic output is contracting by 35%.

Recovery is made more uncertain because different factors in the economy are disrupted: supply chains across international boundaries, demand for goods and services domestically and overseas, and in labour force supply.

While demand for jobs could pick up quickly, Dr Gillespie pointed out that they may not be jobs that are well-matched with the skills of those made unemployed. He said it took eight years for the labour market to recover from the last financial crash in 2008/09.

Consumer confidence may be knocked, and the items people want it spend on may have changed by the time the crisis is over. That presents opportunities as well as challenges for business.

In comparing the last financial crash with the current one, the chief economist pointed out that the economy lost 5% of output in one full year, whereas it is now facing 20% to 30% contraction in only one month.

The scale of the financial response is already far greater, and the scale of government deficits will be too. The OBR estimated a deficit for this year of 14% of gross domestic product, whereas the worst year of the financial crash reached 11%.

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A further assessment of the hit to UK government came on Tuesday from the Centre for Policy Studies, estimating a 15% deficit this year, of more than £300bn. The think tank pointed out this is roughly twice the entire annual budget for the National Health Service.

Dr Gillespie's analysis emphasised how uncertain the current path of recovery will be.

Different parts of the economy will recover at different speeds, with export demands, consumer tastes and business models changing, he argued.

He said prolonged disruption will cut the capacity of businesses to survive and the economy to recover.

He added: "The longer the measures are in place, the harder the impact will be on the public finances and the less scope there will be for a fiscal stimulus in the recovery, with a greater risk of wider economic contagion."