ECONOMISTS have predicted the impact of a no-deal departure from the European Union could cause a “significant contraction” in the Scottish economy.

The Fraser of Allander Institute modelled several possible Brexit outcomes and their consequences in its latest economic commentary.

The research institute’s worst-case scenario is a no-deal outcome with no policy response, which it predicts would cause an overall economic downturn of -2.1% in 2019.

This forecasts a “significant contraction” in the Scottish economy in the second half of 2019 of around 5.5%.

In this scenario, the economy could shrink by 1.5% in 2020 before returning to positive growth of 1.4% by the following year. However, the institute warned that this model assumes no policy response from the Government or Bank of England, which it said is “not very realistic”.

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A second scenario examines a no-deal Brexit with a policy response, which predicts a contraction of 1.9%, leading to -0.2% growth in 2019, followed by -0.3% in 2020 and 1.3% in 2021. The central forecast, based on an orderly departure from the EU in 2019, predicts 1.1% growth this year, 1.4% in 2020 and 1.5% in 2021.

A fourth model envisages business investment being unlocked, perhaps through a deal being agreed, and forecasts growth of 1.7% in 2019, 1.8% in 2020 and 1.6% in 2021.

The report indicates economic growth has remained steady over the course of 2018, with employment at a near record high and unemployment at a record low.

However, economists said earnings and productivity growth remain weak which presents challenges for Scotland’s long-term growth prospects.

Professor Graeme Roy, director of the Fraser of Allander Institute, said: “Last week’s announcement to move the deadline for the UK’s departure from the EU to October has helped to reduce the imminent threat of a no-deal outcome impacting upon the Scottish economy.

“However, it has only kicked the can down the road with little evidence so far of UK policymakers being able to agree a compromise approach.

“The risks to the economy therefore remain high.

“Moreover the nature of the UK’s withdrawal from the EU is but one step in the process – the negotiations on the terms of the UK’s future relationship with the EU have yet to begin in earnest.

“But Brexit should not be the only focus of attention. One consequence of the Brexit debate is that it has left little room for discussion of the emerging structural challenges and opportunities our economy is facing.”

The Fraser of Allander analysis coincides with the publication of a highly critical report by the Institute for Government of the UK Government’s handling of the withdrawal phase of the negotiations. It urged ministers to learn from mistakes and avoid “stumbling into the next phase of negotiations with the EU without a plan”.

The study also criticised the inadequacy of the UK Government’s consultation with the devolved nations and advised it to engage earlier and more consistently ahead of the second Brexit phase.