COMMENT: Graeme Roy is director of the University of Strathclyde's Fraser of Allander Institute
It is nearly five months since the UK voted to leave the EU. This week sees the first major policy response, with Phillip Hammond’s Autumn Statement.
He will have much to ponder.
True, the economy withstood the immediate shock of the referendum better than many – including the Treasury and the Bank of England – expected, but the Chancellor will not be complacent in assuming that this momentum will hold.
READ MORE: Beyond Brexit: Economics will 'drive move to second independence referendum' in Scotland
Businesses have proved to be resilient thus far. Many exporters, including Scotland’s tourism sector, have benefited from the depreciation in Sterling. But as and when the UK Government actually triggers Article 50, and the shape of future arrangements become clearer, the headwinds will become very real.
Prospects for 2017 and 2018 remain uncertain and fragile. Inflation is predicted to rise above 2½% next year and the year after. As a result, households will feel the pinch, with those in the lowest incomes hit hardest.
However the economy performs over the next couple of years, the Chancellor’s focus will undoubtedly be on the longer-term structural challenges that Brexit brings. While there remains a debate about the scale of the impact, few economists dispute the fact that Brexit will act as a brake on our growth prospects.
Trade opens up businesses to new opportunities for exporting and investment. Freedom of movement boosts the supply of skilled workers helping to increase productivity and tackle the economic consequences of an ageing population. Competition promotes efficiency and encourages innovation. And financial integration deepens and broadens capital markets. All of these will be affected in some way by the decision to leave the EU.
Scotland cannot be immune from such effects.
Over 40% of our international exports go to the EU each year. Talk of alternative trade deals is all well and good but they are notoriously difficult to negotiate in practice. Even then, the benefits are smaller than many believe. For example, a trade deal with Australia has been suggested as an early priority. But even if this helped boost our Australian exports by a third, this would be equivalent to less than 2% of our current trade with the EU.
Lost in the debate has been the recognition that the single market is much more than a free trade area. It is underpinned by common standards of regulation, work-conditions and protection for consumers. While trade deals with China and the US are possible, they will require tricky negotiations not just in terms of market access, but across contentious issues such as environmental standards, workers’ rights and safety regulations.
Our modelling in the Fraser of Allander estimates that the long-term impact on the Scottish economy not only from reduced EU trade, but also through reduced demand from within UK-EU supply chains, will be significant – up to 5% of the Scottish economy. Even more optimistic outcomes – such as a Norwegian-style arrangement with Single Market membership but outside the Customs Union – still brings major challenges, including the need to demonstrate ‘proof of origin’ of Scottish exports which would impose a cost and time burden on businesses.
Remaining in the single market is a top priority. But securing a be-spoke deal that protects Scotland’s place – or particular parts of our economy – in the Single Market if the UK is not, won’t be without difficulties and appears challenging.
READ MORE: Beyond Brexit: Economics will 'drive move to second independence referendum' in Scotland
Regardless of the referendum outcome, we need to recognise that many of the economic difficulties we face have been around for decades. Our weak performance in exports and innovation, the growth of in-work poverty and the decline in manufacturing, cannot all be blamed on Brexit. Leaving the EU won’t make tackling these issues any easier, far from it. But it does mean that taking a fresh – and perhaps more honest – look at how best to address these challenges and seek out new opportunities is essential.
This week’s Autumn Statement is the first opportunity to do that. The onus then passes over to the Scottish Government as it readies its Budget next month.
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