Britain’s economy is likely to suffer the worst damage from the Covid-19 crisis of any country in the developed world, according to a report by the Organisation for Economic Cooperation and Development.
A slump in the UK’s national income of 11.5% during 2020 will outstrip the falls in France, Italy, Spain, Germany and the US, the Paris-based thinktank said.
Germany’s decline in national income (GDP) is forecast to be 6.6% this year while Spain’s GDP will fall by 11.1%, Italy’s by 11.3 and France’s by 11.4%. The US, the world’s largest economy, is expected to take a hit of 7.3%.
Highlighting the task awaiting the UK government as it seeks to ease the lockdown, the OECD warned that countries forced to impose the most draconian restrictions faced a long haul back to previous levels of activity.
Anneliese Dodds, Labour’s shadow chancellor, blamed the “deeply worrying” OECD forecast on the government’s “failure to get on top of the health crisis, delay going into lockdown and chaotic mismanagement of the exit from lockdown”, which she argued made the economic impact of the crisis worse.
Responding to the report, the chancellor, Rishi Sunak, said the UK was suffering “in common with many other economies around the world” and the priority was to “support people, jobs and businesses through this crisis – and this is what we’ve done”.
Britain, which is forecast to post an increase in unemployment to around 9%, could make its situation more difficult if it failed to secure a lasting agreement with the EU on trade and access to the single market, the OECD said.
“The failure to conclude a trade deal with the European Union by the end of 2020 or put in place alternative arrangements would have a strongly negative effect on trade and jobs,” it said.
Adding to pressure on No 10 to agree concessions with Brussels to secure a Brexit deal amid the economic damage caused by the pandemic, the credit ratings agency Moody’s warned that a no-deal Brexit would “significantly damage the UK’s potentially fragile recovery from its deepest recession in almost a century”.
Moody’s said a no-deal outcome was fast becoming increasingly likely and would be a severe blow to an economy already weakened by the coronavirus crisis.
The OECD forecast of an 11.5% drop in GDP this year is an improvement on the 14% fall in national income put forward last month as a likely “scenario” by the Bank of England, but will add to pressure on the government after the OECD found that even countries that have come under severe criticism for their handling of the pandemic will fare better than the UK.
Brazil, the US and Sweden were on course for contractions in GDP of 7.4% or less, the OECD said, while China was likely to drop by 2.6% and Russia by 8%.
Defining the global situation as “dire”, the OECD said increases in government debt and the level of outstanding loans of private firms and banks would accompany the downturn, which would average 6% across the world.
It ruled out a V-shaped recovery for the global economy, saying the path back to previous levels of GDP would be hampered by long-lasting effects of the pandemic.
Laurence Boone, the OECD’s chief economist, played down the significance of the UK contracting by the biggest margin in its 2020 economic outlook. She said it was difficult to be precise in the current situation and the exercise showed the UK would experience a similar contraction to Spain, France and Italy, which also imposed severe lockdowns.
She warned that the world economy was “walking a tightrope” and could face a second outbreak of the virus, triggering another lockdown and a more severe recession.
Offering a forecast for both a single and double lockdown, Boone said the UK economy could contract by an unprecedented 14% if the government needed to impose a second lockdown this year.
She said: “These scenarios are by no means exhaustive, but they help frame the field of possibilities and sharpen policies to walk such uncharted grounds. Both scenarios are sobering, as economic activity does not and cannot return to normal under these circumstances.
“By the end of 2021, the loss of income exceeds that of any previous recession over the last 100 years outside wartime, with dire and long-lasting consequences for people, firms and governments,” she said.
The Bank of England governor, Andrew Bailey, said on Wednesday he could see some early signs of an economic recovery in Britain as the government’s coronavirus lockdown restrictions were lifted but agreed there was still likely to be long-term damage.
Speaking at an online conference organised by the World Economic Forum, he said: “If there is any such thing as a normal recession ... this one will be different. There will be elements of a faster recovery, because the first stage of the recovery is literally lifting restrictions and allowing people to go out.
“And we see ... evidence of elements of that recovery starting.” Some surveys of businesses and consumers in May and early June have pointed to some recovery as the lockdown lifts, he added.
Bailey is expected to vote at a policy meeting later this month in favour of the central bank injecting a further £100bn of rescue funds into the financial system to maintain low interest rates for businesses and consumers.
He said long-term damage to the economy was likely as bankruptcies increased and unemployment climbed. “We don’t know how much scarring there will be. I think it is reasonable to say there will be some but it is very hard to judge,” he said.
Figures showing the depth of the recession will be published on Friday when the Office for National Statistics publishes April’s GDP data. The City expects the slump to be severe in response to the lockdown and the mothballing of much of the economy.
