BIGGEST SLUMP FOR 300 YEARS
Spectre of a great depression looms as Chancellor warns: ‘Hardship lies ahead’
BRITAIN faces ‘hardship ahead’, Chancellor Rishi Sunak warned last night after a major study warned the coronavirus lockdown could cause the economy to shrink by a third.
In a sobering report the Office for Budget Responsibility predicted that a three-month lockdown might result in the biggest economic slump in Britain for 300 years.
The independent watchdog said the country’s GDP could contract temporarily by 35 per cent over that time, with unemployment also rocketing by two million.
It came as the International Monetary Fund warned that coronavirus will exact the biggest toll on the global economy since the Great Depression in the 1930s and potentially hit Britain harder than the Spanish Flu epidemic and First World War in a ‘crisis like no other’.
The findings will pile pressure on ministers to begin easing the lockdown measures at the earliest opportunity.
Mr Sunak said the OBR’s forecast was based on ‘just one possible scenario’ – a three-month lockdown followed by three months of gradual return to normality.
But he acknowledged the virus would cause a major economic hit, adding: ‘People should know that there’s hardship ahead and we won’t be able to protect every job or every business.’
Speaking at the daily press conference in Downing Street, he continued: ‘This is going to be hard, our economy’s going to take a significant hit and as I’ve said before that’s not an abstract thing, people are going to feel that in their jobs and in their household incomes... (but) the measures we’ve put in place can significantly mitigate that impact.’
In a warning that tax rises and spending cuts might be required in future, Mr Sunak said the Government would do ‘whatever we need to right the ship’.
The OBR study found the UK could suffer the deepest economic contraction since the South Sea Bubble crisis of 1720.
But it predicted the economy could ‘bounce back quickly’ provided the lockdown does not go on too long, with GDP – an economic snapshot of the country – potentially returning to pre-crisis levels next year. And it said that a major Government scheme to protect millions of jobs will prevent a ‘very much worse outcome’.
In the meantime, however, the figures suggest the lockdown is costing £2billion per day.
The OBR said national debt could rise by almost £400billion this year as spending rockets and tax receipts collapse.
Its forecast is based on a scenario in which the lockdown remains in place for three months and is then removed over the following three. The watchdog predicted this would lead GDP to fall by 35 per cent between April and July, while unemployment would hit 3.4million, leaving 10 per cent of the working population without a job.
The OBR said the economy could bounce back quickly, but would still end the year 13 per cent down, before growing by 18 per cent in 2021 to return to pre-crisis levels.
The forecast predicts the biggest slump since the 18th century, when the South Sea Company – founded in 1711 to reduce national debt – saw stocks dramatically rise then crash. It left thousands of investors ruined and its economic repercussions were felt for years.
The OBR forecast is gloomier than those produced by most City analysts and twice as bleak as the IMF, which yesterday forecast Britain’s economy would shrink by 6.5 per cent this year.
But the IMF said the pandemic would spark the worst economic slump since the 1930s, with global output falling by more than £7trillion this year and next.
The GDP of the eurozone was predicted to shrink by 7.5 per cent this year, with Italy suffering a hit of more than nine per cent. The OBR attributed 90 per cent of the economic collapse to the lockdown measures, with the virus itself accounting for the remainder.
The study found the hospitality sector was on course to shrink by 85 per cent this quarter, with construction down by 70 per cent and manufacturing down 55 per cent.
The study, which officials said would inform the Government’s thinking, also warned that the longer the lockdown goes on, the greater the risk of permanent economic ‘scarring’, such as ‘business failures, cancelled investments and the unemployed becoming disconnected from the labour market’.
But it praised the Government for introducing the job retention scheme, which will see the state pay 80 per cent of the wages of staff who would otherwise be laid off up to a cap of £2,500 a month.
The OBR predicted 30 per cent of all employees will end up in the scheme at a cost to the taxpayer of £42billion over three months.
The forecast was backed up last night by a survey from the British Chambers of Commerce, which found a third of businesses were
placing more than three-quarters of staff on the scheme.
The OBR also warns that the crisis will have a permanent impact on Britain’s debt mountain. Public sector net borrowing is forecast to increase by £218billion, producing a deficit of £273billion, or 14 per cent of GDP. The OBR added: ‘That would be the largest single-year deficit since the Second World War.’ National debt would rise by £384billion – an increase of more than 20 per cent in a single year. Paul Johnson, director of the Institute for Fiscal Studies, described the figures as ‘staggering’, adding that in future ‘tough decisions will have to be made which are likely to involve tax rises and higher debt for some time to come’. Former Tory chancellor George Osborne warned that the ‘effects of this virus will be with us long after’ any cure. Comment – Page 16 Latest coronavirus video news, views and expert advice at mailplus.co.uk/coronavirus