UK economy could sink 35% and unemployment hit 3.4 million, OBR says

Workers on the production line at Nissan's factory in Sunderland once they were told that the car manufacturer would be to end the night time shift at its UK plant.

The UK economy could disappear a cliff edge, potentially plunging 35 percent between April and July but should recover by the end of the year, according to the Office for Budget Responsibility.

Experts at the independent group added that unemployment is expected to hit 3.4 million, around one out of 10 of the working population without a job, if the lockdown lasts 3 months followed by a partial lifting for 3 months.

The OBR added that, on its new prediction, GDP will then jump 25 % within the third quarter along with a further 20 percent in the final three months of 2021.

Public sector net borrowing is also expected to increase by lb218 billion this season, in contrast to March forecasts, hitting lb273 billion, or 14 percent of GDP.

“Largest single-year deficit because the Second World War”

The OBR added: “That would be the largest single-year deficit since the World war 2.

“The sharp rise in borrowing this year largely reflects the impact of monetary disruption on receipts (with smaller effects from policy measures such as the business rates holidays) and policy measures that add to public spending (with smaller effects from higher unemployment).”

Public sector net debt also rises sharply, surpassing 100 percent of GDP in the past year, but ends it at 95 percent compared with previous estimates of 77 percent.

Lasting economic consequences

Forecasters in the OBR were keen to stress this can be a single scenario where “for now, we have not assumed the shock has lasting economic consequences” and should not be taken like a manifestation of what Government policy will probably be.

Businesses are eager for access to cash to stay afloat, with only a small fraction of the money promised which makes it in to the accounts of struggling companies.

The OBR added: “The net effect of the coronavirus impact and also the policy response is apt to be a clear, crisp (but largely temporary) rise in government borrowing which will leave public sector net debt permanently higher like a share of GDP.

“However, the more the period of monetary disruption lasts, the much more likely it's the economy's future potential output will be 'scarred' (because of business failures, cancelled investments and the unemployed becoming disconnected in the labour market).

“If that occurs, the budget deficit would reverse less of its temporary rise as business activities recovers, leaving the federal government to confront a bigger structural deficit and not simply higher debt.”

Unemployment

On unemployment, the OBR predicts the steep rise of two.A million put into the 1.3 million already out of work, might be brief.

It said: “As with GDP, the rise in unemployment is likely to be very fast, as the sharp rise in new claims for UC already attests.

“Indeed, we might expect the majority of the rise to happen inside the first month.”

The organisation added the unemployment numbers could shift again due to uncertainty over whether Government interventions to pay for salaries will be extended.