Treasury forecaster’s three stark predictions for Britain’s economy | Economic recovery

Treasury forecaster’s three stark predictions for Britain’s economy | Economic recovery


The Office for Budget Responsibility, the Treasury’s official forecaster, has published three possible scenarios for the UK economy as it tries to recover from the coronavirus pandemic:

Central scenario

The economy recovers more slowly than previously anticipated, with gross domestic product (GDP) regaining its pre-virus peak by the end of 2022. GDP falls by 12.4% in 2020.

Business investment is 6% lower over five years than expected by the OBR in March before Covid-19 spread. Job losses and business failures are significant. Scarring caused by job losses and lower levels of business investment mean the level of GDP after inflation remains 3% lower at the start of 2025 than anticipated in March.

Unemployment more than doubling from 1.3 million last year to 3.5 million in 2021. Outstripping the damage inflicted by the 2008 financial crisis, the unemployment rate peaks at 12% in the final three months of 2020.

The hit to the economy, coupled with the rise in state spending to cushion the blow, results in a sharp rise in government borrowing this year. The budget deficit – the shortfall between income from taxes and expenditure – hits £322bn, or 16% of GDP.

The UK’s national debt – the sum total of every budget deficit recorded in history – increases above 100% GDP for the first time since the early 1960s in all years of the scenario.

Best-case scenario

Activity rebounds relatively quickly, similar to the OBR’s central scenario published in April during the early stages of the Covid-19 emergency. GDP returns to the pre-virus peak by the end of March next year, and there is no enduring economic scarring.

Unemployment still however reaches a peak of 10% in the three months to September. As many as 1.9 million people would be out of work next year, as employment begins to gradually rise again.

GDP still also falls by 10.6% this year, although snaps back rapidly next year.

The limited damage to employment helps to protect household finances, enabling a recovery in consumer spending to levels close to that expected in March.

The government’s budget deficit hits £263bn this year, or 13% of GDP, before gradually dropping back by 2025 to end up near the levels expected before coronavirus struck.

Worst-case scenario

Economic output recovers even more slowly, returning to its pre-virus peak only by 2024. This results in a more significant loss of business investment, company failures and persistently high levels of unemployment.

Due to lasting economic scarring caused by the depth of the crisis and slow recovery, GDP after inflation is 6% lower at the start of 2025 than was expected in March 2020.

Unemployment peaks at 13% in the first three months of 2021, in a jobs crisis worse than the period of high unemployment under the Thatcher government of the 1980s. As many as 4 million people would be out of work next year.

GDP plunges by 14.3% this year, marking the worst recession for three centuries. The severe blow to household finances from the sharp increase in unemployment causes a severe decline in consumer spending, hurting the economy. Household consumption does not return to its pre-virus peak at all in the five-year scenario.

Due to the economic collapse and higher levels of state spending necessary, the budget deficit reaches£391bn, or 21% of GDP.



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