UK on course for deepest recession in three centuries and highest borrowing since the war

Coronavirus is on course to deliver the biggest annual fall in GDP since the 1700s and the highest borrowing since the Second World War, the Resolution Foundation said today (Tuesday) in response to the Office for Budget Responsibility’s (OBR) latest economic outlook.

The projected quarterly GDP fall of 35 per cent in the second quarter of this year is by far the largest since records began in 1955. It is more than 12 times the previous record contraction of -2.7 per cent in the first quarter of 1974. Looking at 2020 as a whole, the OBR projects an annual fall in GDP of 12.8 per cent. This would be six times as big as that seen during the 1980s recession and more than two times bigger than the depth of the financial crisis.

The OBR project the unemployment rate to hit 10 per cent in the second quarter of 2020. While this would be the highest since 1993, the existence of the Job Retention Scheme means that many of those not working will continue to receive wages and maintain their attachment to their employer. The OBR agrees with Resolution Foundation estimates last week that “around 30 per cent of employees will be covered” by the scheme, equating to 8.3 million workers.

This economic damage combined with the policy response to it is projected to see government borrowing reach 13.9 per cent. This would be its highest level since the war, exceeding the 10.2 per cent seen in 2009-10. As a result the OBR projects debt to reach its highest level since the 1960s.

While these forecasts are incredibly grim, the Foundation warns against simplistic arguments that this damage could be avoided by lifting the lockdown now. The trade-off between economic and health considerations are often overdone, because ending the lockdown now could lead not only lead to more deaths but also a need for a re-imposition of even stricter and longer-lasting restrictions later.

The Foundation adds that policy makers should recognise that this scenario may not be the worst case scenario. The OBR’s scenario is based on the lockdown lasting only 3 months, but with considerable uncertainty about the eventual exit it is possible that some restrictions may need to last beyond that point. This scenario also assumes almost no scarring or lasting impact on the economy from this recession, which history shows is unlikely to be the case. Policy makers should therefore be considering a range of scenarios for the duration of lockdowns and the path of the economy. The Resolution Foundation will be publishing such a set of such scenarios later this week.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“The UK is experiencing a deeper recession than we have seen for three centuries and is on course for the highest borrowing since the war.
“While driven by the government’s twin decisions to close down large swathes of our economy and to offer unprecedented support to firms and families, its actual cause is the coronavirus outbreak itself. This should caution against those arguing that policy makers can avoid these costs by simply ending the current lockdown.”
“Policy makers should also recognise 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.”