Professor Graeme Roy: The climb back for Scotland's economy has begun

Covid-19 dealt the business world a blow, but the Scottish economy is expected to find its way to a ‘new normal’. Main picture: Shutterstock

Covid-19 continues to cause havoc across large parts of the Scottish economy. Day-to-day economic activity is estimated to have shrunk by almost one-fifth between April and June. Of course, Scotland is not unique in this regard, with the UK and wider global economies also experiencing a deep recession.

The good news is that as we move through the government’s roadmap for easing the lockdown restrictions, the recovery should begin to build momentum.

What are the 3 key pillars needed to grow a tech business?

Businesses across Scotland have shown remarkable resilience in the face of the Covid-19 crisis – far beyond what many of us would have thought possible early on.

New ways of working, the adoption of new technologies and switching to new products and services have been a common feature across all sectors of our economy. Many of these changes have been delivered at an unprecedented pace.

Support from both the UK and Scottish governments has undoubtedly helped. History is likely to judge the furlough scheme as one of the most effective economic policy measures ever put in place during a recession. The Eat Out to Help Out scheme has helped boost a beleaguered hospitality sector.

Why Scotland's deals market is attractive for foreign investors

And the Scottish Government’s business rates support package has provided a lifeline for many businesses struggling to keep up with costs with little in the way of revenue coming in.

But ultimately a vaccine, alongside effective treatment and care, is the only guaranteed route out of this crisis. Sadly, while progress on developing a vaccine has been remarkably quick, it will be some time yet before one is ready at scale.

As a result, the recovery is likely to be slow and gradual. While key parts of our economy have opened back up – the latest official data suggests that more than 96 per cent of businesses in Scotland are back trading again –

many are operating at only a fraction of normal levels.

How family businesses are battling the Covid recession

At the same time, as recent local lockdowns have shown, the outlook is also hugely uncertain. Businesses will have to prepare not just for a weak outlook but a potentially hugely disrupted one too. Add to this the gradual lifting of

government support over the next few weeks and, for many, the next phase in this crisis is likely to prove just as challenging as anything that we have seen so far.

While the immediate priority for many businesses is survival, many will be looking at their business models and the investments needed to succeed in a future economy that will look – whenever we come out the other side of this crisis – radically different from the one we knew back in early 2020.

The experience of the last few months is likely to make many businesses more reflective about their vulnerability to major economic disruption. Re-examining capital buffers will be one consideration,

but so too will be issues around supply chain resilience and managing risk.

Brodies advises business resilience in turbulent times

Perhaps the greatest legacy of this crisis will be the acceleration towards digital ways of working, in terms of workforce, route to market and the use of cloud-enabled technologies. Home working has become the norm for many of us.

On sales, the sharp rise in digital markets will also be here to stay. Unsurprisingly, businesses that were investing in technology – from online sales platforms through to digital marketing strategies and data security – have coped best in the current crisis. For the rest it’s a race to catch-up.

In short, the Covid-19 crisis has accelerated change. For some businesses and investors this crisis will be an opportunity to develop a new strategy to grow relative market share and to create a launchpad for future growth. Merger and acquisition activity is therefore likely to play a key in the medium to long-term recovery of our economy.

At the start of the lockdown, M&A activities – like all other aspects of our economy – dried up. The immediate outlook suggests that such activity will remain supressed for some time to come.

Understandably, many investors and business owners are focussed upon the “here and now”, whether that be issues of liquidity, fixing supply chains or simply supporting their clients and employees. At the same time, with so much uncertainty, robust valuations are exceptionally hard to pin down. Throw in basic practicalities of ensuring due diligence when face-to-face meetings and travel are hugely restricted and it is not hard to expect things to remain fragile for some time yet.

Nevertheless, activity will start to pick up as businesses seek to reposition themselves for a “new normal”. Some businesses will be vulnerable to takeover, while the changing nature of our economy – particularly the importance of digital and online activity – will create opportunities for new partnerships with genuine value added to be gained.

M&A activity is not always the most popular aspect of corporate dealings among the general public, particularly if there are concerns over shareholder value and the potential for heavy job losses. Social attitudes are also changing, with a greater expectation on how businesses and investors consider wider objectives, such as the environment and how they value their employees.

But if our economy is to rebuild following Covid-19, the potential for M&A activity to act as a positive force for the necessary restructuring of our economy, and to help stave off large-scale redundancies and business closures, should not be overlooked.