Looming recession poses second global
embarrassment for UK
First coronavirus, now the OECD says Britain will top
the developing world’s recession league table. Here’s why
Larry
Elliott Economics editor
Wed 10 Jun
2020 12.37 BST
Worse than
Italy. Worse than Spain. Britain has already had more deaths from Covid-19 than
any other European country. Now it faces the possibility of a second
embarrassment: the deepest recession of any nation in the developed world.
There’s not
much in it, according to the latest forecasts from the Organisation for
Economic Cooperation and Development. Italy and Spain are also propping up the
league table put together by the Paris-based thinktank. A lot can happen
between now and the end of 2020, a year that has not yet reached its mid-point.
Even so,
the OECD’s findings make grim reading. It thinks the economy will contract by
11.5% in the event of a single hit and by 14% if the virus returns later in the
year. The 37-member thinktank says one is no more likely than the other.
So why is
the UK set to do much worse than Germany, which expects output to contract by
6.6% in the event of a single hit?
One factor
identified by the OECD is the importance of the service sector to the UK
economy. Trade, tourism, real estate and hospitality together make up a
sizeable chunk of gross domestic products and all have been hard hit by the
lockdown.
Having delayed imposing restrictions, the UK needed a
near-blanket ban on activity from late March to early May to control the spread
of the pandemic. Business and consumer confidence has been dented, unemployment
is rising despite the government’s furlough scheme and there is uncertainty
about how quickly restrictions will be lifted.
The OECD
predicts recovery will take time and that by the end of 2021 output will still
be 5% below pre-crisis levels. The continued need for working parents to look
after school-age children is one important reason for the lack of a rapid
bounce back.
Samuel
Tombs, a UK analyst at the consultancy Pantheon, has estimated that school
closures wiped 8% off GDP in April and May, and 7% after the partial reopening
in June. It is easy to see why ministers are so keen to see schools fully
operational.
UK economy likely to suffer worst Covid-19
damage, says OECD
Forecast slump in GDP of 11.5% will exceed falls by
France, Italy, Spain and Germany
Phillip
Inman
@phillipinman
Wed 10 Jun
2020 09.01 BSTLast modified on Wed 10 Jun 2020 10.29 BST
Britain’s
economy is likely to suffer the worst damage from the Covid-19 crisis of any
country in the developed world, according to a report by the Organisation for
Economic Cooperation and Development.
A slump in
the UK’s national income of 11.5% during 2020 will outstrip the falls in
France, Italy, Spain and Germany, the Paris-based thinktank said.
Germany’s
decline in national income (GDP) will be 6.6% this year while Spain’s GDP will
fall by 11.1%, Italy’s by 11.3 and France’s by 11.4%.
Highlighting
the task awaiting the UK government as it seeks to ease the lockdown, the OECD
ruled out a V-shaped recovery for the global economy, saying the path back to
previous levels of activity would be hampered by long-lasting effects of the
pandemic.
The forecast
of an 11.5% drop in GDP this year is an improvement on the 14% fall in national
income put forward last month as a likely “scenario” by the Bank of England,
but will add to pressure on the government after the OECD found that even
countries that have come under severe criticism for their handling of the
pandemic will fare better than the UK.
Brazil, the
US and Sweden were on course for contractions in GDP of 7.4% or less, the OECD
said, while China was likely to drop by 2.6% and Russia by 8%.
Defining the
global situation as “dire”, the OECD said increases in government debt and the
level of outstanding loans of private firms and banks would accompany the
downturn, which would average 6% across the world.
Laurence
Boone, the OECD’s chief economist, played down the significance of the UK
contracting by the biggest margin in its 2020 economic outlook. She said it was
difficult to be precise in the current situation and the exercise showed the UK
would experience a similar contraction to Spain, France and Italy, which also
imposed severe lockdowns.
She warned that the world economy was “walking a
tightrope” and could face a second outbreak of the virus, triggering another
lockdown and a more severe recession.
Offering a
forecast for both a single and double lockdown, Boone said the UK economy could
contract by an unprecedented 14% if the government needed to impose a second
lockdown this year.
She said:
“These scenarios are by no means exhaustive, but they help frame the field of
possibilities and sharpen policies to walk such uncharted grounds. Both
scenarios are sobering, as economic activity does not and cannot return to
normal under these circumstances.
“By the end
of 2021, the loss of income exceeds that of any previous recession over the
last 100 years outside wartime, with dire and long-lasting consequences for
people, firms and governments,” she said.
Fearing an
escalation of trade restrictions that would hamper the recovery, Boone said
governments must prioritise cooperation, both in finding a vaccine and
providing targeted support for hard-hit industries.
“Global
cooperation to tackle the virus with a treatment and vaccine and a broader
resumption of multilateral dialogue will be key for reducing doubt and unlock
economic momentum,” she said.
“The
international community should ensure that when a vaccine or treatment is
available it can be distributed rapidly worldwide. Otherwise the threat will
stay. Likewise, resuming a constructive dialogue on trade would lift business
confidence and the appetite for investment.
“Governments
must seize this opportunity to engineer a fairer and more sustainable economy,
making competition and regulation smarter, modernising government taxes,
spending, and social protection. Prosperity comes from dialogue and
cooperation. This holds true at the national and global level.”
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