The road ahead Forecast for economic recovery

The UK economy is expected to shrink by more than a tenth this year but the country’s long-term prosperity is highly dependent on the trajectory of the Covid-19 pandemic, the government spending watchdog said yesterday.

The Office for Budget Responsibility (OBR) outlined three potential scenarios for the economy and borrowing based on the effectiveness of coronavirus vaccines and the severity of future public health restrictions.

Under the “central” scenario the OBR predicted the economy would shrink by 11.3 per cent this year – the biggest fall since 1709. The forecast is based on vaccines becoming effective from mid-2021 and ongoing restrictions equivalent to the Tier 2 rules imposed in parts of England in October.

Under these conditions – a 10pm curfew on pubs and restaurants and restrictions on indoor mixing between households – it would take until the final three months of 2022 for the economy to return to its pre-covid peak.

In the more negative “downside” scenario, where a national lockdown is in place for much of 2021 and coronavirus jabs prove ineffective, the economy could take five years to recover to pre-pandemic levels.

A protracted pandemic would also inflict further damage on the public finances and result in peak unemployment of 11 per cent or 3.8 million people compared with 2.6 million under the central scenario.

The economic damage will be less severe if vaccines are widely available by spring. If this happens unemployment would peak at 5.1 per cent and the amount of goods and services produced in the UK would return to pre-covid levels by the end of next year.

All three scenarios assume the UK manages to agree a trade deal with the EU. A no-deal Brexit would wipe an extra two per cent off the economy next year and reduce longer term gross domestic product (GDP) by 1.5 per cent. It would also drive up inflation and public borrowing while increasing unemployment by close to 350,000.

Lower tax receipts and increased welfare spending would help push up borrowing by £10 billion a year from 2021-22 while prices for consumers could rise by 1.5 per cent above the central forecast.