Looking into the abyss – the latest Fraser of Allander Economic Commentary

In the latest economic commentary - first full Scottish economic forecast since the credit crunch became a banking crisis - University of Strathclyde’s Fraser of Allander Institute looks into the abyss and outlines what may lie ahead for Scots.

It investigates four potential scenarios for the Scottish economy over the period 2009 – 2012, and outlines the impact not only on job losses but unemployment ILO (International Labour Organisation) measures and GDP (Gross Domestic Product).

The commentary states that the current recession is the likely outcome of the global financial crisis. This was triggered by: the collapse of the house price bubble, initially in the United States; massive foreclosures in the US sub-prime mortgage market; and, significant bank and hedge fund losses across the globe as the value of innovative investments based on sub-prime mortgages collapsed.  The uncertain solvency of many financial institutions has created an unprecedented loss of confidence and trust in the banking system resulting in a major breakdown in the credit supply mechanism.

Lesson from earlier recessions

 An examination by Fraser of Allander of previous recessions supports the view that cyclical fluctuations of Scottish GDP have less amplitude than in the UK economy. Therefore the business cycle has tended to be effectively flatter in Scotland and so both upswings and downswings are less severe here than in the UK. The commentary considers that the scale of the downturn now facing Scotland will probably be less severe than the 1980/81 recession. This is principally because on that occasion, monetary and fiscal policy effectively accommodated, even exacerbated, the recession and was not used counter-cyclically to combat the downturn.

That this will not happen on this occasion is indicated by the recent swinging cuts in interest rates in the UK and the US, and the willingness of government to borrow more and run up higher levels of public debt. However, Fraser of Allander also concludes that it is less sure that the Scottish economy will weather the coming downturn better than the UK.

Forecasts

The economic commentary also features a central or base forecast and three alternative scenarios.

Should the country succumb to a sustained recession, the resulting redundancies predicted from the banking fall out added to a potential shakeout of hoarded labour could see job losses reach as much as 117,000 by 2010 and ILO peak at 7.1%.

The base forecast - which has a 40% forecast probability - paints a less gloomy picture with more than 41,000 job losses predicted and a 6.1% peak on the ILO measure. 

To see the economic commentary in full including all four scenarios, go to the University of Strathclyde website.

Contact details
Email: Lynn Hunter
Tel: +44 (0)141 245 2152