Economists have warned Treasury select committee MPs the UK could go into recession in the next quarter and rubbished claims from the chancellor Rishi Sunak that coronavirus effects would be temporary.
Sunak warned the coronavirus would have a “significant … but temporary impact” on the UK economy in his first budget delivered before parliament last Wednesday.
Figures from the Office for Budget Responsibility published alongside the budget showed a “slightly reduced” forecast for GDP growth of 1.1% in 2020. The OBR said growth would pick up in 2021 to 1.8% before dipping to 1.5% the following year.
‘It’s a question of how much we’re shrinking’
But witnesses speaking before the Treasury Committee on Monday said the OBR forecast, which did not take into account the impact of the coronavirus, is not worth the paper it’s written on.
Institute for Fiscal Studies director Paul Johnson said the OBR’s assessment was valuable in describing the situation the UK was in before the coronavirus hit – “weak business investment, weak productivity growth, weak expected growth over the next two to three years”. “But as a forecast for what’s going to happen over the next couple of years, it’s of no value at all.”
“It’s definitely not a question of is the economy growing by 1.1% this year or 0.8%, it’s a question of how much we’re shrinking,” added Resolution Foundation chief executive Torsten Bell.
Coronavirus could have lasting impact on UK economy
Bell dismissed notions put forward by the government that the coronavirus would have a temporary effect on the economy.
“There’s going to be a big impact,” said Bell. “Too much of the discussion is focused on the idea that what you’re going to be seeing is people off work for two weeks and they need sick pay to cover. I think we need to step back and think more realistically we’re seeing a broader economic effect that’s going to see large numbers of people losing their jobs, hours being cut, businesses in trouble.
“There are reasons why elements of it are definitely temporary, but it is bigger than a lot of the conversations are suggesting.”
The extent of the permanent damage is hard to gauge, said Bell. While the effects of the supply shock will dissipate as people return to work, the demand shocks resulting from behavioural changes could have “a lasting effect”.
The virus could also discourage further business investment in the UK, which had already been falling due to expectations of slower future growth, he said.
Recession probably will kick off in Q2
Professor Linda Yueh, Economist at Oxford University and London Business School told MPs the UK was “in synch” with most major economies which are headed toward a recession.
But she said it is hard to assess the impact the coronavirus, which presents both a demand and a supply shock, will have on the economy and how quickly.
“It’s already the case that we are at a point where a downside shock is likely to tip the economy into a contraction of GDP,” Yueh said. “I would say that would be probably showing up in the second quarter. I say, ‘probably’ because it’s hard to know how much of the impact we’ll feel in March.”
The coronavirus has already wiped billions off the market caps of Britain’s biggest businesses with the FTSE 100 down 34% year-to-date.
