Scotland may see recession thanks to Brexit volatility

Scotland faces a prolonged period of economic uncertainty and volatility, according to a new report warning of an increase in unemployment and a reduction of growth following the Brexit vote.

The fallout from the Brexit vote is likely to hit Scotland hard. Picture: PA

The Fraser of Allander Institute’s report has revised down its Scottish GDP growth forecasts and warned the country may enter a short recession within the next three years.

A European Commentary produced by the Institute in response to the EU referendum outcome forecast growth of just 0.9 per cent in 2016, 0.5 per cent in 2017, and 0.7 per cent in 2018.

The forecasts represent a downward revision to growth of -0.5 percentage points in 2016, 1.4 points in 2017 and 
1.3 points in 2018 relative to pre-referendum forecasts.

Although growth is likely to be lower, it is also likely to remain positive on an annual basis. However, the report warned that a short “technical recession” – two consecutive quarters of falling output – is “highly possible” within the next three years.

The sharp fall in the pound and the expected Bank of England monetary stimulus meant Scotland was likely to avoid a more sustained recession, the Fraser of Allander economists said.

But the Strathclyde University-based Institute predicted that unemployment would rise to 7 per cent in 2017. The Institute warned: “A prolonged period of economic uncertainty and financial volatility as the terms of ‘exit’ are negotiated is now unavoidable. This will carry risks for investment, household incomes and jobs.

“Moreover, trade and investment prospects will be damaged by the decision to leave the EU, according to the report. As businesses and investors adjust, the Fraser expects growth to slow.”

It added that it was important not to overstate the risks, arguing that Brexit was “materially different” from the financial crises of 2008 and 2009.

Professor Graeme Roy, director of the Institute, said: “Given Scotland’s fragile economic performance over the past 18 months, the impact of the EU referendum result is exactly what the Scottish economy did not need.

“The top priority has to be retaining access to the Single Market, which will help mitigate some of the most damaging effects on investment, trade, productivity and jobs. Whether or not this can be achieved without freedom of movement is highly uncertain.”