Guest Writer: The Economic Implications for Scotland from the COVID-19 pandemic

Gary Gillespie
Chief Economist
Scottish Government


I was last a Guest Writer for the Quarterly Review in September 2018, in which I wrote about the challenges and opportunities for the Scottish economy on the back of a decade of economic and political developments, such as the global financial crisis and the UK vote to leave the EU.

While these themes continue to have a significant bearing on the Scottish economy, the outbreak of the COVID-19 pandemic this year has created an unprecedented global economic crisis and has fundamentally changed the way we are looking at the economic landscape and outlook for households, businesses and government.

The COVID-19 pandemic is first and foremost a health crisis and the priority has been to protect public health. This has necessitated the shutdown of economic activity in many parts of the Scottish economy, impacting types of work rather than whole sectors given requirements to physical distance, which has impacted engineering activity alongside other sectors. Our analysis suggests economic output in Scotland could fall by around one third during the current period of physical distancing, similar to estimates for the UK and other economies.

These estimates are unprecedented in scale and that is reflected in the level of support being provided via the various government backed schemes providing employment support, grants, tax (and debt) deferrals and wider support to the business base across the UK to maintain cash flow, incomes, wages and employment.

This support is crucial to protect productive capacity in the engineering sectors and broader Scottish economy, but can’t fully mitigate the scale of the impacts being felt and the uncertainty relating to the recovery and shape of future demand both through domestic supply chains and internationally.

The international nature of the engineering sectors also means that they have been particularly exposed to the disruptions in global markets, supply chains and the collapse in demand in international export markets.

The recent unprecedented falls in the oil price illustrates the global extent of this crisis and the imbalance of supply and demand. Though driven primarily by the collapse in demand for energy relating to travel, this has had significant knock on effects on wider products and engineering services in Scotland, of which oil related engineering services remain an important part of the Scottish economy. Similar examples of extreme disruption to markets are evident across other sectors reflecting disruption to activity, demand or supply and the resulting imbalances which are making previously profitable businesses and markets no longer able to function.

So what are the challenges to engineering in Scotland and globally? Firstly, the skills, technology and innovation within the sector mean it will be able to respond and has a significant role in driving the recovery in Scotland. Many of the challenges posed by COVID-19 will require different perspectives and approaches to workplaces, products and markets. All of these are essential skills inherent in Scottish engineering.

Secondly, global supply chains may shorten across markets and we should see opportunities for the re-shoring of activity from Asia to Europe alongside opportunities through domestic UK markets to provide new products in response to both the public health pandemic and the need to ensure greater domestic resilience across key product groups.

Thirdly, the links with our University base and continued reputation for excellence in engineering mean we remain attractive for inward investment. All of which is crucial to ensure we remain internationally competitive.

Finally, COVID-19 has fundamentally changed many of the key assumptions relating to the operation of the global economy and how the economy and business operates.  We have seen a reversal in trends in weeks which had previously taken years to build up and develop. These changes will lead to an acceleration in behavioural change from consumers, which will drive new business models and wider markets. How business operate will also change significantly. Though this causes disruption and uncertainty at this time, it will also drive innovation and provides an opportunity to make a step change in many areas, such as the transition to net zero, which is driving new opportunities in energy supply and the circular economy. Therefore, despite the immediate challenges to the sector, engineering and the wider services the sector provide, are crucial in modern economies and Scotland must retain a strong and diverse sector.