UK economy faces 35% quarterly plunge if lockdown lasts

The UK economy faces a 35 per cent drop in output in the second quarter if a lockdown to fight the spread of coronavirus remained in place for three months, the country’s fiscal watchdog has warned.

The UK’s lockdown has already plunged the economy into a deep recession that looks likely to leave a £218bn hole in the public finances compared with its March forecasts, according to the Office for Budget Responsibility.

This would largely be the result of a collapse in tax revenues, as well as government measures such as business rate holidays and spending to support household and business finances.

The OBR said the figures should be taken as a “reference scenario”, not a forecast of what was most likely to happen, since it could not predict how long restrictions on economic activity would last.

It has assumed that the three-month lockdown would be followed by a further three months of partial restrictions, after which the economy would recover quickly with no lasting damage.

Even on these relatively benign assumptions, gross domestic product would still fall by 13 per cent on an annual basis in 2020 — far bigger than the annual falls seen around the ends of each world war or in the financial crisis, the OBR said.

This would lead to an explosion of the deficit, climbing to almost 14 per cent of GDP in 2020-21 — more than double its peak in the aftermath of the 2008 financial crisis, and the highest level since the second world war.

In March, the OBR had forecast it would reach just 2.4 per cent of GDP in this fiscal year.

Public sector net debt would rise sharply to exceed 100 per cent of GDP, ending the fiscal year at 95 per cent of GDP — compared with the 77 per cent the OBR had forecast just over a month ago. It would remain 10 per cent of GDP above the Budget forecast even in 2024-25. 

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