Britain faces biggest economic shock in 300 years if coronavirus lockdown extends to summer
Britain will suffer its deepest recession for 300 years if the coronavirus lockdown continues into the summer, according to the budget watchdog, as the Chancellor warned of “tough times” to come.
The Office for Budget Responsibility said the economy could shrink by 35 per cent this spring, with unemployment soaring by two million to its highest level since the nineties. It came as the International Monetary Fund said the global economy was heading for its biggest slump since the Great Depression of the thirties.
The OBR also said government borrowing could hit its highest level since the Second World War. Rishi Sunak stressed that the forecast – which assumes the lockdown continues for another two months – was “just one potential scenario”, but said it was “important that we’re honest” about the economic impact of the virus causing “hardship ahead”.
The grim forecast intensified the debate about when the lockdown should be eased.
Dominic Raab, the acting prime minister, is expected to announce on Thursday that it will carry on into next month, but many ministers are anxious to find ways of easing restrictions as soon as possible to ensure the long-term economic damage does not lead to more deaths than the virus itself.
The official UK death toll hit 12,107 on Tuesday as another 778 people died, with government sources stressing there could be no talk of an exit strategy “before we have reached the peak”.
NHS England said the number of coronavirus hospital admissions was “stabilising”, but deaths would take longer to fall significantly.
The economic hit from coronavirus has been far worse than ministers expected, costing billions more per week than predicted because more businesses have shut their doors and furloughed or shed staff than was hoped.
The OBR, which is independent of the Government but works closely with the Treasury, said Gross Domestic Product could fall by more than a third in the second quarter of the year if the lockdown lasts for three months – into June – and was followed by another three months of partial lockdown.
It would be the deepest recession since records began, and would put the UK on course for the biggest annual decline in the economy since 1709.
Mr Sunak said the effect of the virus was “unlike anything we have seen before” and that the OBR figures “suggest that the scale of what we are facing will have serious implications”.
He added: “These are tough times and there will be more to come. People should know that there’s hardship ahead. We won’t be able to protect every job or every business.”
While the OBR said the economy could quickly bounce back once restrictions were lifted, with output returning to normal by the end of the year, unemployment would take longer to recover.
It said the jobless total would rise by 2.1 million to 3.4 million by the end of June, going from the current rate of 3.9 per cent to 10 per cent, its highest level since 1993, and potentially higher than at any time since the eighties.
The OBR said unemployment would not return below 4 per cent until 2023.
A three-month lockdown would also increase borrowing by £218 billion to £273 billion this financial year, amounting to 14 per cent of GDP. It would represent the largest deficit as a share of GDP since the Second World War.
Total debt could briefly go above 100 per cent of GDP and remain at 84.9 per cent of GDP in four years’ time, compared with the 75.3 per cent forecast in the March Budget.
The former chancellor George Osborne said the figures were “shocking” and amounted to a “staggering loss of economic output, a staggering increase in national debt and of course the real tragedy here is a massive increase in unemployment”.
Robert Chote, the chairman of the OBR, said: “The longer the lockdown goes on, the more likely it is that the future potential of the economy is scarred by business failures, by less business investment and by the unemployed finding it harder to get back into the labour market.”
Under the OBR’s scenario, GDP would fall by 13 per cent overall in 2020, which it said would “comfortably exceed any of the annual falls around the end of each world war or in the financial crisis”.
The worst quarterly drop during the 2008 financial crisis was two per cent.
However, the OBR stressed that the restrictions were necessary to protect the economy from a more prolonged slowdown.
The IMF said it expected the world economy to shrink by three per cent this year, the “worst recession since the Great Depression” of 1929-39, according to its chief economist Gita Gopinath. She that for the first time since the Depression, both advanced, emerging market and developing economies would all be in recession.
Mr Sunak declined to say how the Government would pay for the schemes it has introduced to prop up the economy, only that “once we get through this we will have to take stock of public finances and the economy and make the right decisions ... whatever we need to right the ship”.
Mr Sunak faced questions about whether the Government will be forced to abandon the pensions “triple lock” which currently guarantees payments rise by 2.5 per cent, the rate of inflation or average earnings growth, whichever is highest. He said he could not “write future budgets here today”.