In 1941, Britain considered its colony of Singapore to be pretty much impregnable. But while the naval base was bristling with big guns, its defences were geared towards preventing a sea-based invasion and when the attack came it was on land, down the Malay peninsula. Britain was expecting trouble, just not from that direction.
The same fate has befallen the International Monetary Fund and the Office for Budget Responsibility, both of which have been forced to rip up their forecasts as a result of Covid-19. Both organisations knew there was potential for things to go wrong: they simply did not spot the likely cause.
The fact that the Covid-19 pandemic spread so quickly meant countries had virtually no time to prepare. Nor had they any experience of a recession arriving with such sudden ferocity. A look back at past slumps shows that it normally takes 18 months to two years for output to fall from peak to trough. This time, both the International Monetary Find (IMF) and the Office for Budget Responsibility (OBR) think the UK is already experiencing the worst of the slump and that, following a swift collapse, recovery will begin in the second half of 2020.
But there are significant differences between the IMF and the OBR assessments. The Washington-based IMF thinks the UK will contract by 6.5% this year; the OBR – using more timely data – thinks the figure will be double that.
The OBR is assuming that each month of lockdown costs the economy 35% in lost output, knocking 3% off annual GDP for each month. After three months in full quarantine – during which the economy would shrink by 9% – the lifting of the restrictions would halve the output lost each month to around 1.5%. By the end of the fourth quarter, output would be back to its pre-Covid crisis levels but the size of the economy would be down 13% year on year.
The IMF is more cautious, and is pencilling in a more gradual recovery not just for the UK but for the global economy as a whole.
It remains to be seen how gradual the process proves to be, and whether it is interrupted by a recurrence of the Covid-19 virus. The IMF is encouraged by the evidence that the lockdowns are helping contain the virus and thinks the extraordinary policy response from central banks will help limit the number of firms going bust and job losses.
But it has sketched alternatives to its baseline forecast, which take into account extended lockdowns and a second outbreak.
This would mean a deepened and prolonged downturn running well into next year. Should this worst-case scenario happen the world economy would be on course to shrink by more than 10% and talk of a second Great Depression would be merited.
