Britain’s economy will shrink by a fifth during 2020 if the continued presence of Covid-19 means a full lockdown has to remain in place for a year, according to a study.
With the government set to decide next week whether to ease restrictions put in place at the end of March, the consultancy firm Capital Economics said each additional month of full quarantining would knock 1.5 percentage points off annual growth.
It said even with severe containment measures remaining in place only until the end of June and with some easing of restrictions in the coming weeks, the economy would shrink by 12% this year.
Ruth Gregory, senior UK economist at Capital Economics, said there would be a much bigger hit if multiple peaks of the virus forced ministers to keep stringent measures in place until April 2021. In those circumstances, Gregory said, the economy would contract by 19.6% this year, a recession three times as severe as that which followed the global financial crisis in 2008.
In addition, the expected bounceback in the economy would be delayed with the level of output still more than 6% below where it would have been in the absence of the pandemic by the end of 2022.
On his return to work this week, Boris Johnson said that it was too soon to ease the lockdown despite signs that physical distancing had led to a fall in the number of hospital deaths and the number of new cases of Covid-19.
The Office for Budget Responsibility (OBR), the independent body that provides economic forecasts for the government, has pencilled in a fall of 35% in gross domestic product in the second quarter on the assumption that a full lockdown remains in place until the end of June.
The OBR is assuming half the restrictions will be lifted between July and September, with the rest being removed in the final three months of the year. On that basis, output would return to its pre-crisis level by the end of the year, with an annual fall in GDP between 2019 and 2020 of more than 13%.
Gregory said she was assuming output had fallen by 25% from its pre-crisis peak during March and April, and would stagnate during May before starting to edge up in June. In the unlikely event of an immediate end to the lockdown, recovery would begin at the start of May but the economy would still shrink by 8.2% during 2020.
Gregory said that all the scenarios outlined in her report were simplified versions of what the reality is likely to be: “The restrictions are unlikely to be relaxed all at once and there is already evidence that even while the economy is shut down some activity is trickling back.”
She added: “The longer the restrictions are in place, the longer it may take the economy to recover to pre-recession levels because of scarring effects. Indeed, in the past four recessions it took between three and five years for the economy to return to its pre-crisis level.”
