U.K. Economy Could Shrink 35% This Quarter if Lockdown Persists
U.K. Economy Could Shrink by 35% in Second Quarter, OBR Says
(Bloomberg) -- A protracted lockdown could see the U.K. economy shrink by more than a third this quarter, increasing unemployment by over 2 million and sending the budget deficit to its highest since World War II.
The dire scenario from the Office for Budget Responsibility Tuesday came as the International Monetary Fund warned that the British economy is on course to contract more this year than it did when the financial crisis was raging.
The Washington-based lender sees gross domestic product plunging 6.5% in 2020 as a whole, compared with 4.2% in 2009. That’s still much less than the 13% projected by the OBR under a scenario where Britain remains in lockdown for three months to bring the coronavirus pandemic under control.
The OBR, which describes the figures as a “reference scenario” rather than a forecast because it has no idea how long the lockdown will last, assumes there will be a further three-month period when the curbs are partially lifted. The hit to the economy would be severe in the short term but prove temporary, it said.
Boris Johnson’s government has offered 60 billion pounds ($75 billion) of direct support for companies and individuals affected by more than three weeks of severe restrictions. It includes a pledge to pay 80% of the wages of people put on temporary leave by their employers, and increased unemployment support.
“The immediate cost of the government’s actions may be high, but we can be confident that the cost of inaction would ultimately have been much higher,” the OBR said in its analysis.
Under the scenario, real gross domestic products falls by 35% in the second quarter, but bounces back quickly. Unemployment, currently less than 4%, surges to 10% in the period and 218 billion pounds is added to government borrowing in the current fiscal year.
That would take the budget deficit to 273 billion pounds, or 14% of GDP compared with 2% now, and briefly push debt above 100% of GDP, the watchdog said. The deterioration reflects both the cost of government aid and the hit to tax revenue from the economic downturn.
Responding to the report, Chancellor of the Exchequer Rishi Sunak acknowledged the economic blow will “very significant,” as it will be for economies around the world.
“It’s important we’re honest about that,” he told BBC Television. “People should know there is hardship ahead, we won’t be able to protect every job or every business.”
According to the latest survey of economists conducted by Bloomberg, the U.K. economy will contract 5% this year, before rebounding with growth averaging 3% over the following two years.
©2020 Bloomberg L.P.