Richard Partington – The Guardian April 14, 2020

Britain’s economy could shrink by 35% this spring and unemployment soar by more than 2 million due to the coronavirus crisis, the government’s independent economics forecaster has warned.

In a stark assessment of the economic fallout from Covid-19 as lockdown measures bring 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% 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% by the end of June and government borrowing this year would increase at the fastest pace since the second world war.

The analysis comes as countries around the world attempt 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 wealthy world, the International Monetary Fund 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% this year. The Washington-based fund had forecast growth of 3.3% this year as recently as three months ago.

The OBR’s gloomy outlook for the UK was published after the foreign secretary, Dominic Raab, warned the UK 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 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 its pre-virus levels as quickly as the end of this year.

Outlining the escalating risks to Britain from the economic collapse, the OBR 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% of GDP. Although this would rank as Britain’s biggest peacetime budget deficit, the OBR said the damage to jobs and growth would have been far greater without the emergency spending package.

The budget deficit would still be greater than the one inherited in 2010 by David Cameron’s coalition government after the financial crisis, which encouraged the former Tory prime minister to embark on an 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.

Underlining the tough choices facing ministers over how best to end the lockdown, the OBR warned that each additional month of tight controls on economic and social activity 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% of GDP this year and remain around 10% higher than was previously forecast by the end of the parliament in 2025.

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.

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 thing it would mean that things were a lot worse.”

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