There are also concerns that banks may stop lending to Scottish firms who do most of their business in the EU, while investment may nosedive as global corporations see the UK as a “less attractive” option.
The vital flow of migrant labour to Scotland from the EU may also dry up as workers are discouraged from coming to the UK, according to the latest State of the Economy report published by the Scottish Government’s chief economist Dr Gary Gillespie.
The Scottish economy has remained buoyant in recent years despite the Brexit threat, as the North Sea oil and gas industry continues to bounce back. Growth in the second quarter of this year reached its highest level since 2014, today’s report says.
But “more volatility” is likely as EU exit looms amid growing concerns of a “no-deal” Brexit.
“It remains unclear the extent to which any UK agreement, if achieved, will enable an orderly transition,” Dr Gillespie warns in the report.
“Uncertainty relating to the form and timing of agreement for EU exit remains a key concern for many sectors of the economy and goods and services sectors will be impacted in different ways.”
A key concern is that businesses and consumers may “stockpile” goods in advance of the country’s EU exit next March to protect supply chains, amid growing fears that a “no-deal” Brexit could make this awkward.
Although it will result in an immediate “bounce” in the economy with a 0.4 per cent boost to overall GDP growth levels, this will be “more than offset” by a subsequent slowdown in the years following Brexit.
Today’s report sets out a possible £38 billion “shock” to the economy in the six months before Brexit across the UK, according to modelling from the Centre for Economic and Business Research (CEBR).
The proposed impact of Brexit could also see businesses delay hiring new staff, as well as making investment and purchases as the economic environment becomes more uncertain.
International investors may view the UK as a “less attractive” proposition, the report warns.
Critically for Scotland, the vital flow of EU migrants, who are deemed essential to keep the population growing and filling key roles in the NHS and social care, may be jeopardised. They may be discouraged from moving to, or may decide to leave, the UK.
And Scottish firms which do much of their business in the EU may struggle to access cash from banks, which will be reluctant to lend to them amid uncertainty over the future relationship with EU, which may undermine their business model.
A key fear is the climate of uncertainty may hit consumer spending levels. New analysis in the report indicates confidence among consumers has been weak since the EU referendum and remains negative. Today’s report notes Scottish GDP grew 0.5 per cent between April and June 2018, a marginal increase on the 0.4 per cent the previous quarter and above the rate of the UK as a whole at 0.4 per cent.
The improvement was attributed to strong export growth on the back of a weaker pound and the rising value of oil.
Scotland’s labour market has also performed well, with unemployment close to record lows. Independent forecasts of the Scottish economy suggest output growth in Scotland could strengthen over the next couple of years, however will remain below trend.
“With less than six months to go before the UK leaves the EU, Brexit remains the key downside risk to Scotland’s economic outlook,” the report adds.