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Watchdog Predicts Biggest Recession in Three Centuries

Hopes of a fast, v-shaped recovery in the UK economy have begun to fade, as the Office for Budget Responsibility (OBR) issued a warning of the biggest slump in 300 years. This is the country’s independent fiscal watchdog, and their latest update doesn’t make for happy reading.

What Do They Say?

The OBR’s grim prediction includes, among other things, the expectation of the UK’s largest budget deficit ever seen in peacetime. They actually looked at three possible scenarios, but all of them included the worst recession in living memory. Only in the most optimistic was the UK’s GDP higher than the country’s debt.

We need to go back to the Great Frost of 1609, in pre-industrial Europe, to find a sharper economic downturn. They expect the UK’s output to fall by 10.6% this year and for there to be a massive rise in borrowing levels.

The headline figures include debt going over 100% of GDP and the budget deficit rising to somewhere between 13% and 21%. Their baseline numbers in the central scenario show public sector borrowing shooting up to £322 billion this year, which would be 16% of the GDP. This projection was completed before chancellor Rishi Sunak’s latest £30 billion package.

The Figures for May

May brought a degree of respite from the devastating economic news of the previous months. This is because the country’s GDP showed a modest rise of 1.8%. While this is good news, some analysts were expecting a sharper rise following the plunge of 20.3% in April.

This slow start to the post-lockdown recovery has led to many experts now suggesting that it could be years before the UK economy gets back on track, with numerous businesses now using a collection agency to navigate the slow period.

If we go back to the OBR report, they suggest that it could take as long as 5 years for the British GDP to recover. They also believe that unemployment could spiral up to 4 million (a 13% rate) next year. This would put it above 1980’s levels, with the peak arriving in the first quarter of 2021.

The OBR suggests that it could be 2025 before the economy gets back to its pre-Covid level, with output fully recovering at the end of 2024. Even then, they think that it will still be smaller in real terms when accounting for inflation.

A Look Further Ahead

As part of their bleak outlook, the OBR warned that the £2 trillion debt pile won’t be dealt with by relying upon inflation. Looking further ahead, they predicted that the national debt will be 5 times bigger than the economy by the time 2070 arrives.

This is the first time in decades that the UK’s debt is higher than its GDP. In the past, governments could rely upon inflation to tackle it. The watchdog now thinks that increased taxes and harsh spending cuts are the only ways of handling this crisis.

Early availability of a vaccine could accelerate the recovery, while a second wave of the coronavirus would make it even slower than predicted above.