finance

Economic recovery continues, but risk of living standards squeeze looms



The Scottish economy is set to recover to pre-pandemic levels three months earlier than previously thought.

The latest quarterly update from the Fraser of Allander Institute predicts growth of 6.5% in 2021 and 4.8% in 2022, meaning the economy should get back to pre-pandemic levels next April.

Despite the economy contracting slightly in July, mainly due to a fall in renewable electricity production, growth was significantly faster during the second quarter than expected, leading to the upward revision in forecasts.

However, the Deloitte-sponsored economic commentary pointed out several risks that still threaten the recovery.

Today is the last day of the Job Retention Scheme, which has been pivotal in supporting household incomes and businesses since March 2020.

This uncertainty coincides with the cancellation of the Universal Credit uplift, which will bring additional financial hardship to around half a million families in Scotland.

As well as the risk of joblessness, labour shortages are becoming clear in many sectors, threatening goods shortages and adding to wider inflationary risks.

Consumer confidence, which the University of Strathclyde research institute pointed out has been so important for the improvement in outlook over the last six months, could start to wane as prices across the economy rise.

Mairi Spowage, director at the Fraser of Allander Institute, commented: “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.”

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