Businesses and households to ‘feel the squeeze’ in coming months, experts warn

Businesses already hit hard by the coronavirus pandemic could be about to “suffer further” as the “cost-of-living crisis really starts to bit”, economic experts have warned.

The Fraser of Allander Institute said the resilience of firms operating in sectors such as hospitality and leisure is “likely to be tested again”.

The economic think tank issued the warning as it downgraded its forecasts for growth in 2022, saying it now expects this to rise by 3.5% – not the 4.7% previously forecast.

The war in Ukraine will have “implications for the costs of goods and services in our country”, the think tank said in its latest economic commentary.

While Scotland’s economy has now returned to pre-pandemic levels, it also noted that the number of people who are economically inactive because of long-term sickness is up by more than 20,000 compared to two years ago.

The report said: “This may well become the key legacy of the pandemic, and in the months ahead should be a key priority for Government.

“Two years on from the first lockdown, it would be great to be optimistic about the economic prospects for 2022.

“Unfortunately, global uncertainties and the cost-of-living crisis, which are not unrelated to each other, have doused that enthusiasm with a bucket of cold water.”

While the report stressed the war in Ukraine is “first and foremost a humanitarian disaster”, it added this will have implications for the costs of both goods and services in Scotland and the UK.

Although Scotland’s economy has passed the “milestone” of returning to pre-pandemic levels, the experts said the different sectors that make up the economy tell a “disparate sectoral story”.

The report noted: “The hospitality, arts, leisure and culture and ‘other services’ sectors remain significantly below pre-pandemic levels of output. Other services covers businesses like hairdressers and beauticians which have been heavily impacted by restrictions.

“These sectors may suffer further as consumers cut back discretionary spending as the cost-of-living crisis really starts to bite.

“The resilience of these businesses is likely to be tested yet again.”

Fraser of Allander director Professor Mairi Spowage warned that both consumers and businesses “are going to feel the squeeze in the coming months, if they haven’t already, with soaring energy and food bills”.

She warned measures announced by chancellor Rishi Sunak in his spring statement are “not likely to be sufficiently targeted to help those on the lowest incomes”.

With businesses and households feeling the pinch, Prof Spowage said: “This has the potential to limit the economic recovery we hope to see during 2022, as consumers cut back on discretionary spending, and even perhaps businesses limit production due to input costs.

“These circumstances have led us to revise down our expectations for growth during 2022.”

But she added: “Economic forecasting is a tricky business at the best of times, but forecasts are highly uncertain right now.”

Steve Williams, senior partner at Deloitte, which sponsors the institute’s economic commentary, said: “Despite the easing of pandemic-related restrictions more recently, expectations for an economic recovery are being dampened by a number of factors, not least the war in Ukraine.

“Businesses continue to face a variety of difficulties including soaring operating costs and labour shortages, while the cost-of-living crisis continues to grow in parallel with learning to live with Covid-19.

“Businesses have proven their resilience throughout the pandemic but as such significant challenges remain, it is important that business leaders continue to prioritise how they support their employees.

“Employee health and wellbeing must be placed at the centre of working practices to help ensure more engaged, resilient and productive teams over the longer term.”

A Scottish Government spokesman said: “The Scottish Government recognises that some sectors remain fragile as we recover from the pandemic, and we are focused on working with businesses to invest in growth.

“We are doing all we can to ensure people, communities and businesses are given as much support as possible to deal with the rising cost of living.

“Most of the powers required to tackle these issues are reserved to the UK Government, which is why the finance secretary wrote to the chancellor (Rishi Sunak), urging him to take much needed action in his spring statement.

“We are committed to supporting our businesses recovery and have provided more than £4.5bn in support since the beginning of the pandemic, including £1.6bn in rates relief – the most generous of the UK administrations.”