London: Britain’s economy could shrink by 35 percent this spring and unemployment soar by more than 2 million due to the coronavirus (COVID-19) crisis, the government’s independent economic forecaster has warned.
In a stark assessment of the economic fallout from COVID-19 as lockdown measures bring much of the country to a standstill, the Office for Budget Responsibility said that gross domestic product (GDP) could plunge by more than a third in the second quarter of the year and by 13 percent for 2020 as a whole.
Sounding the alarm that the immediate hit to living standards could be worse than the initial shock of the 2008 financial crisis, it said joblessness could hit 10 percent by the end of June and government borrowing this year would increase at the fastest pace since the Second World War.
After a decade of steady job creation to drive unemployment to its lowest rate since the mid-1970s before the coronavirus hit, such an increase in people losing their jobs would return the country to levels last recorded in the early 1990s recession, when Britain crashed out of the European Exchange Rate Mechanism.
The Office for Budget Responsibility (OBR) analysis came as countries around the world try to devise exit strategies from lockdown conditions despite a rising global death toll.
With business activity and social life effectively brought to a coordinated standstill in most of the developed world, the International Monetary Fund (IMF) also warned on Tuesday of an economic slump unparalleled since the Great Depression of the 1930s.
In its half-yearly forecasts, the IMF said the “Great Lockdown” could cause global GDP to contract by around 3 percent this year. The Washington-based fund had forecast growth of 3.3 percent this year as recently as three months ago.
Gita Gopinath, the IMF’s economic counsellor, said the size of the hit to the global economy, uncertainty about how long the shock would last, and the need to discourage economic activity to contain the virus had to lead to a crisis “like no other”.
The IMF, which forecast a 2020 drop in UK output of 6.5 percent, also predicted GDP falls of 9.1 percent and 8 percent respectively for Italy and Spain – the two worst-affected European economies from COVID-19 so far – and expects Chinese growth to fall from an expected 6.1 percent to just 1.2 percent, its lowest level in decades.
Gopinath warned the declines could be far larger: “Much worse growth outcomes are possible and maybe even likely.”
The OBR’s gloomy outlook for the UK was published after the foreign secretary, Dominic Raab, warned the country could remain in lockdown for at least another month. The OBR said: “The longer the period of economic disruption lasts, the more likely it is that the economy’s future potential output will be scarred.”
In a grim assessment that depends heavily on how long ministers decide to keep the lockdown measures in place, the OBR scenario assumed that tight controls would be maintained for three months, followed by a further three months when they are only partially lifted.
The watchdog said it was not attempting to predict what ministers would ultimately decide. Warning that there was a high degree of uncertainty, it said the hit to jobs and growth could be plausibly greater or smaller.
Offering a degree of optimism as the outlook worsens, the OBR said the economy could quickly snap back from the deepest crash in more than a century, with GDP recovering to its pre-virus levels as quickly as the end of this year.
Outlining the escalating risks to Britain from the economic collapse, the government’s forecasters also warned that public borrowing would almost quintuple this year as the government ramps up its emergency support package for struggling households and businesses.
According to the tax and spending watchdog, borrowing could rise to around £273bn, or 14 percent of GDP.
This would rank as Britain’s biggest peacetime budget deficit, but the OBR said the damage to jobs and growth would have been far greater without the emergency spending package.
The budget deficit would be greater than the one inherited in 2010 by David Cameron’s coalition government following the financial crisis, which encouraged the former Tory prime minister to embark on a painful austerity drive in an attempt to balance the books. Despite a decade of deep cuts to public services, the deficit remained at almost £50bn in the last financial year.
Paul Johnson, director of the Institute for Fiscal Studies, said a complete reappraisal of economic policy would be required once the dust settled on the coronavirus crisis but predicted that a return to austerity was unlikely. “Tough decisions will have to be made which are likely to involve tax rises and higher debt for some time to come,” he said.
Warning that the prospect for jobs and growth could significantly worsen if lockdown measures are extended well into the summer, Johnson added: “We must not underestimate just how staggering these figures are, and by how much the economic outlook has shifted compared to just a few months ago.”
Underlining the tough choices facing ministers over how best to end the steps to curtail social and business activity, the OBR warned that each additional month of tight control would cost the exchequer as much as £45bn of additional borrowing.
As the economy crashes and public borrowing balloons, Britain’s national debt – the sum of every annual budget deficit – is expected to spiral to more than 100 percent of GDP this year.
Rishi Sunak, the chancellor, said it was clear the coronavirus pandemic would have a very significant impact on the UK economy, just as it would for other nations around the world.
“People should know that there is hardship ahead and we won’t be able to protect every job or every business,” he said at the government’s daily press briefing.
Saying that the OBR forecasts were only a potential scenario, he said the report had confirmed government actions had protected jobs. “If we hadn’t done these things it would mean that things were a lot worse.”
Against a background of mounting concerns over the government’s exit strategy, some observers warned against oversimplifying the argument between balancing economic prosperity with the health of the country.
The Resolution Foundation warned that ending the lockdown now could lead to more deaths in the future, as well as the need for a reimposition of tougher lockdown measures that could cause greater economic damage.
Torsten Bell, the think-tank’s chief executive, said: “This should caution against those arguing that policymakers can avoid these costs by simply ending the current lockdown.
“Policymakers should also recognize that these forecasts represent just one scenario for a three-month lockdown. History shows that measures to control a pandemic can in fact last much longer.”
(UNA-OIC)
