The Office for Budget Responsibility’s report on coronavirus and the economy was full of doubt, but it made one fact clear: the UK’s lockdown cannot last long. The document shows the devastating impact to GDP of a three-month lockdown: “Each month of full economic lockdown reduces monthly output by 35 per cent… and therefore takes around 3 per cent off a full year’s real GDP.”
These numbers are even worse than those of a recent OECD analysis, which implied a fall in GDP of around 2 per cent per month.
The OBR assumes a quick bounce-back thereafter, and thus a yearly fall in UK GDP of (only) 13 per cent. That would be a more severe fall than any on record, including the Spanish flu of 1918-20, which is estimated to have killed more than 200,000 people in the UK. This is the optimistic scenario. The optimism continues into 2021, with GDP forecast to rise by 18 per cent as part a “V-shaped” recovery.
One former senior Treasury official I spoke to believed the OBR had indeed been “too optimistic”. Growth could fall further and may recover less slowly. But whatever the precise impact to the UK, these dire numbers – along with the accompanying surge in the UK’s debt-to-GDP ratio, from 79 per cent at present to a forecast of 95 per cent next year – only confirm that the lockdown will have to be weakened, not strengthened, over the summer.
The UK lockdown began on 23 March, which means the OBR assumes it will be over by July. It is unclear how that will be possible, since the UK currently has no capacity to test or trace its population at scale, and is only now recognising the potential benefits of masks, a month after the deputy chief medical officer, Jenny Harries, baselessly stated that they were harmful on 12 March.
But the ending of the lockdown will soon become essential. One highly placed source I spoke to recently on the government’s SPI-M and Nervtag committees, who has been actively involved in government planning, agreed that “we can’t stay like this indefinitely”. He even suggested that “the virus cannot be stopped (unless a vaccine comes along)”, which would mean the lockdown is only a means of building up healthcare capacity and absorbing further waves.
The UK economy will have to reopen in the second half of the year, or the most severe projected fall in GDP on record will only worsen: held for a full year, it would almost triple. Such an outcome is likely to become as untenable as the government’s initial plan to only mitigate the impact of the virus – and not attempt to suppress it (see this for more on that, and how the plan changed).
The OBR report is above all a warning to the government. The lockdown cannot last. It only has so much time to come up with an exit strategy.
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