Interactive Investor

The UK’s GDP is set to plunge – but recovery may be quicker than in other countries

The UK economy is more resilient than many other comparable economies.

15th April 2020 14:05

Tom Bailey from interactive investor

The UK economy is more resilient than many other comparable economies.

The UK’s economic output could fall by 35% in the second quarter of the year if the current lockdown restrictions remain in place, according to analysis from the Office of Budget Responsibility (OBR).

The figure is one of the OBR’s assumptions as part of its analysis focused on the impact of coronavirus on public borrowing and debt. Therefore, the figure should be seen as a “reference scenario” rather than a forecast.

The estimated fall in GDP is based on OBR analysis of the expected fall in the share of output per industry, accounting for the continued contribution of key workers and those able to work from home.

The 35% quarter-on-quarter drop in GDP is similar to that estimated by France’s national institute for statistics and economic studies, due to similar economic lockdown measures being adopted.

However, working on the assumption that the lockdown stays in place for three months, with no extensions or new outbreaks, the OBR expects GDP to start to bounce back sharply in the third quarter, with output returning to pre-crisis levels by the fourth quarter.

The OBR also anticipates a sharp rise in unemployment, with an expected two million extra people out of work, bringing the rate to 10%. The rebound in employment, however, is expected to be much slower than that of GDP.

All this is expected to see the UK’s public deficit balloon to 14% in the 2020/2021 financial year. That would be the largest single-year deficit since the Second World War.

The scenario outlined by the OBR is slightly more pessimistic than the forecast of economics consultancy Pantheon Macroeconomics. The consultancy believes the UK economy’s output is 20% below its pre-virus level during the current lockdown. However, in terms of quarter-to-quarter output figures, it says it is currently expecting a 15% drop.

 

However, as with the OBR, Pantheon Macroeconomics expects a relatively sharp rebound once lockdown measures are lifted. They note: “UK GDP, however, should return to its pre-virus level earlier next year than in most other countries.”

Partly this is the result of the Bank of England and the Treasury both moving quickly and decisively. While already-low interest rates led many commentators to fear that the central banks had run out of “firepower” to support the economy, the Bank engaging in quantitative easing has allowed it to provide the equivalent of a deeper rate cut, says Pantheon.

On top of that, Pantheon points out that the Bank’s quantitative easing measures has ensured the Treasury has the fiscal space to properly respond the crisis. They note: “The Bank is enabling massive fiscal stimulus by purchasing gilts at an unprecedented rate - it is on course to have bought nearly £200 billion of gilts by the end of June.”

However, Pantheon also points out the UK economy is more resilient than many other comparable economies. They note: “The economy showed in the last decade that it can cope well with structural change; the labour market is flexible and the barriers to business formation are low.”

They also point to the fact that the past few years of no-deal Brexit fears have left may households and firms in a stronger place to deal with the present crisis. They note that “households and firms’ balance sheets are in relatively good shape, due to the caution instilled over the last three years by heightened political uncertainty.”

This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.

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