As the Covid-19 pandemic continues to wreak havoc, Chancellor Rishi Sunak acknowledged that the UK could face its most significant economic downturn in 300 years. The dire situation was highlighted as the UK’s Covid-19 death toll reached 12,107, and government figures suggested that the country’s economy might contract by a record-breaking 35 percent by June.
The consequences of this economic downturn are expected to result in 2 million job losses and pay cuts.
Forecasts by the Office for Budget Responsibility, produced separately, indicate that unemployment could surge to 3.4 million, and the deficit could reach £218 billion in this year alone. These figures predict the most substantial GDP slump in a single quarter since records began in 1908. The International Monetary Fund (IMF) also added to the alarm, warning that the global economy would experience its most profound decline since the Great Depression of the 1930s.
The Chancellor emphasized the unprecedented nature of the crisis, necessitating an equally unparalleled economic response. Small businesses, struggling to stay afloat, urged the Chancellor to expedite financial assistance. These businesses face the imminent risk of closure if they cannot cover staff wages.
The economic contraction is expected to surpass even historic events like the South Sea Bubble crash of 1720, the World Wars, the Wall Street Crash of 1929, the Spanish Flu pandemic of 1918, the 1970s energy crisis, and the 2008 financial crash. Rishi Sunak expressed optimism that the UK could recover swiftly once the lockdown measures are lifted.
However, the OBR warned of a peak in unemployment to 3.4 million in the summer, with joblessness remaining above 2 million throughout this year and into 2021. Average wages are expected to plummet by 10.6 percent this year, and the hit to public finances due to lost growth will be substantial.
Government borrowing to support the economy is projected to increase by an extraordinary £218 billion this year, marking the largest annual deficit since World War Two. The UK’s national debt is set to rise above 100 percent of GDP, a significant concern.
The OBR’s optimistic prediction of a rapid recovery at the end of the year faced criticism from some analysts who foresee a more extended “L-shaped” recession, where economic recovery could take several years.
The British Chamber of Commerce revealed that 66 percent of businesses surveyed have placed their staff on furlough, relying on the government to cover 80 percent of wages. Dr. Adam Marshall, the Director-General, stressed the need for quick financial support as businesses approach a critical point with April’s payday looming.
The IMF’s forecast suggests a three percent global economic contraction this year, dwarfing the 0.1 percent contraction seen during the financial crisis in 2009. It previously predicted a 3.3 percent global economic growth for this year, but now anticipates a 6.5 percent contraction for the UK economy in 2020. The Chief Economist of the IMF, Gita Gopinath, characterized this crisis as unique and deeply impactful, with solvency issues and significant unemployment posing long-term challenges. The uncertainty surrounding the duration and intensity of the crisis is comparable to a war or political crisis, leaving lasting scars on the economy. The IMF warns that a lengthier pandemic could further reduce output, and a return of the virus in 2021 could result in a substantial economic hit.
This crisis is unlike any other, and the risks of a worse outcome prevail.
