LONDON — With British Prime Minister Boris Johnson out of the hospital, and slowly recovering from the coronavirus, and hopes for a lockdown easing next month, there is a fragile feeling of optimism in the air.
Adding to that is a scenario, mapped out by the U.K. Office for Budget Responsibility, that sees the British economy contracting 35 percent during lockdown in the second quarter and a bounce back in the third quarter with “no lasting economic hit.”
As always, timing will be everything.
The OBR is a watchdog that looks to provide independent analysis of the U.K.’s public finances. On Tuesday, it sketched out its hypothetical scenario, and said that while the immediate cost of the government’s actions may be high, “we can be confident that the cost of inaction would ultimately have been much higher.”
As reported, the British government has come up with a fiscal rescue package of 350 billion pounds aimed at helping businesses and individuals through the crisis. It includes plans to pay furloughed workers 80 percent of their salaries if companies promise not to lay them off. The government has also promised to pay 80 percent of the profits of the self-employed.
The OBR’s report said the net effect of the coronavirus impact and the U.K.’s policy response is likely to result in “a sharp (but largely temporary) increase in government borrowing” that will leave public sector debt permanently higher as a share of GDP, but still at a reasonably comfortable level.
If the lockdown lasts longer than three months, it is likely the economy’s future potential output will be “scarred, thanks to business failures, canceled investments and the unemployed becoming disconnected from the labor market.”
The optimistic second-quarter scenario also sees unemployment rising by more than 2 million to 10 percent, and declining more slowly than GDP recovers, with government policies “supporting households through the shock.”
During the daily government media conference, Britain’s Chancellor of the Exchequer Rishi Sunak responded to the findings of the OBR.
“Our economy is going to take a significant hit, but the measures we have put in place, such as the furlough scheme, can mitigate the short-term impact on the economy. We can bounce back as early as possible. It will be difficult in the short term, but we can get our lives and the economy back to normal,” said Sunak, adding that the aim is to get businesses moving again, as soon as possible.
He said that local governments had already begun to administer government grants to businesses, while “millions of pounds are going out the door” in bank loans. The furlough scheme should be active within days, he added. “The best way out is to grow the economy and keep as much [activity] as possible intact.”
Sunak added that while COVID-19 would have “serious implications for the economy,” the most important thing right now is to protect the health of the people, and the ability of the National Health Service to cope with the illness.
Asked about Brexit, Sunak reiterated that the U.K. is committed to its timeline for trade negotiations with the European Union and will leave the bloc for good, with or without a trade deal, on Dec. 31, as planned. He said that trade talks with the EU are continuing via video conferences and legal agreements are being signed, “and we’re hopeful we can continue” to negotiate.
The OBR published its scenario within hours of the International Monetary Fund’s releasing its projection that the U.K. economy would contract by 6.5 percent in 2020, compared with its January forecast of 1.4 percent GDP growth.
The IMF said the global economy would drop by 3 percent this year in the worst economic crisis since the Great Depression of the last century. The IMF added that all major economies will fall into recession this year, with global growth rebounding to 5.8 percent in 2021, if countries manage to bring the pandemic under control in the second half of 2020.