The Outlook for Scotland s Economy in a post-brexit (and Trump!) world

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1 The Outlook for Scotland s Economy in a post-brexit (and Trump!) world Professor Graeme Roy Director Fraser of Allander Institute November: 2016

2 Recent Developments

3 Some short-term economic considerations Economic uncertainty Policy clarity Financial market volatility Sharp depreciation in Sterling

4 Chief Financial Officers uncertain environment!! 40 % of CFO's Uncertainty v. high CFO Survey Response

5 Some short-term economic considerations Economic uncertainty Policy clarity Financial market volatility Sharp depreciation in Sterling

6 Exchange Rate - Depreciation

7 Rising Inflation

8 Scotland s recent economic performance % 1.20% 1.00% Scotland UK % chnage Q on Q 0.80% 0.60% 0.40% 0.20% 0.00% -0.20% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q

9 What do we know so far. Economic Outlook for Scotland (and the UK) highly uncertain Likely to be some time before full economic & financial implications are known Lack of preparation in our survey, over 85% of Scottish firms said that they had done no preparation or very little preparation for leave But talk of long and deep recession is wide of the mark

10 And then we have the US elections US economy markets typically don t like surprises..and certainly not one like this. But, stock market has largely shrugged off volatility to post near record highs So all positive???..clue lies in the bond market.

11 US Elections US 10 Year Treasuries Yield

12 Longer Term

13 Some Stats Around 40% of Scottish international exports are to the EU More than N. America, Asia, S. America, Middle East and Australasia combined But remember..over 60% of TOTAL exports are to ruk Scotland ranked 2 nd in UK for international investment 180,000 EU nationals living in Scotland EU firms employ around 115,000 people in Scotland

14 EU Exports 14,000 12,000 10,000 million 8,000 6,000 4,000 2,000 - EU North America Asia reurope Middle East Africa Other

15 Some Stats Around 40% of Scottish international exports are to the EU More than N. America, Asia, S. America, Middle East and Australasia combined But remember..over 60% of TOTAL exports are to ruk Scotland ranked 2 nd in UK for international investment 180,000 EU nationals living in Scotland EU firms employ around 115,000 people in Scotland

16 Some Stats Around 40% of Scottish international exports are to the EU More than N. America, Asia, S. America, Middle East and Australasia combined But remember..over 60% of TOTAL exports are to ruk Scotland ranked 2 nd in UK for international investment 180,000 EU nationals living in Scotland EU firms employ around 115,000 people in Scotland

17 Long-term economic considerations of Brexit Trading relationships with EU and non-eu countries International investment access to EU capital markets Population & labour market future migration trends & regulation Fiscal contributions gross & net contributions Dynamic effects productivity, competition, innovation

18 The Options The Norway (EEA) Model No tariffs on goods or services Access to single market Agriculture and fishing excluded face tariffs No Customs Union Negotiate separate trade deals Economic Border No opportunity to shape EU Rules and regulations Reduced Budget contribution Retain four freedoms Including free movement of people

19 The Options The Swiss Model Access bits of Single Market Goods freely traded but Services excluded No opportunity to shape EU Rules and regulations Reduced Budget contribution Agriculture and fishing excluded face tariffs No Customs Union Retain four freedoms Including free movement of people

20 The Options Other Alternatives Free Trade Area No tariffs on trade with EU Limited other forms of integration Negotiate separate trade deals Zero fiscal contribution WTO Membership No special relationship with EU Average tariff of 5.3% (12.2% on agriculture) No obligation to apply EU laws Zero fiscal contribution

21 Our Modelling Significant impact on Scotland - scale depends upon final deal We found that the impact is slightly less on Scotland than ruk The size of the relative long-term impact by sector depends on complex interplay between EU-export intensity and sensitivity to changes in competitiveness

22 Next Steps for Policy Understanding the trade-offs from the specific terms of the negotiated exit from the EU; Identifying the sectors and areas of the economy e.g. elements of international investment, the labour market etc. most likely to be impacted by Brexit; The policy opportunities that may open up both at the Scottish and UK level from no longer being bound by EU commitments and obligations; and, Reassessing existing policy priorities and commitments, and crucially the delivery of the government s Economic Strategy, in a world where Scotland is no longer part of the EU.

23 Conclusions

24 Conclusions Brexit is likely to prove to be a challenging headwind for the Scottish economy but need to put in context Scale of impact depends on precise form of Brexit Ultimately, impact will also depend upon how policymakers react to challenges and new opportunities