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OBR: Coronavirus pandemic delivered largest forecast errors on record

·Business Reporter, Yahoo Finance UK
·3-min read
LONDON, ENGLAND - DECEMBER 09: Commuters make their way across London Bridge towards the city of London during the morning rush hour on December 9, 2021 in London, England. Last night, the British prime minister announced the introduction of
In March last year, at the start of the coronavirus pandemic, the OBR predicted a 0.1% hit to GDP in 2020, however, it actually fell by 10% as a whole. Photo: Chris J Ratcliffe/Getty Images

The pandemic delivered one of the largest peacetime shocks to the UK economy in history and the largest forecast errors on record, the Office for Budget Responsibility (OBR) said on Thursday.

In March last year, at the start of the coronavirus pandemic, the OBR predicted a 0.1% hit to GDP in 2020, however, it actually fell by 10% as a whole. This was the largest drop in output since 1921 and almost twice the size of the recession in the wake of the 2008 financial crisis.

This was also an 11 percentage point shortfall relative to its expectations, representing the largest year-ahead forecast error on record.

The pandemic also resulted in a peacetime record budget deficit of £323bn ($425bn) in 2020-21 (15% of GDP), £268bn higher than the March 2020 forecast, another record forecast error, the OBR’s forecast evaluation report said.

“Once the pandemic struck, the differences between our initial forecasts and outturn were partly due to some sectors, such as manufacturing and construction, rebounding much faster from the first lockdown, and partly due to measurement issues in the public and real estate sectors,” it said.

“And while we expected smaller impacts on output in the second and third lockdowns than in the initial one, we still underestimated the degree of adaptability to lockdown conditions and therefore overestimated the extent to which output was hit.”

Read more: European stock markets muted as new COVID restrictions imposed in England

The OBR was created in 2010 to provide independent and authoritative analysis of the UK public finances.

At least twice a year it publishes a set of official forecasts for the economy and the public finances for the coming five years in its economic and fiscal outlook (EFO).

The government uses these forecasts as the basis for its budget decisions, however, the OBR often stresses the uncertainty that surrounds them.

One striking feature of the pandemic was how sectorally differentiated its economic effects were.

Output plummeted in the first lockdown in sectors where close proximity between customers and the workforce is unavoidable, but was much less affected in sectors where remote working is feasible.

As a result, whereas output dropped to around 25% below pre-pandemic levels in April 2020 it was only 9% lower in January 2021, despite both being spent in full national lockdown.

Read more: UK's £3tn property windfall 'unequal, unearned and untaxed'

Meanwhile, the extensions of the government’s furlough scheme explained the successive overestimates of unemployment.

In earlier forecasts, government policy was to end the furlough scheme before the vaccines had been fully rolled out and economic activity had recovered. Due to this, OBR forecasts assumed that this would result in large numbers of furloughed employees becoming unemployed.

“But our November 2020 upside scenario showed how aligning the end of furlough more closely to the recovery of output could limit any rise in unemployment,” it added.

“By the March 2021 Budget, the furlough scheme was extended far enough for this to be true in our central forecast too. Indeed, the subsequent strong recovery has meant that the end of furlough appears to have had remarkably little immediate impact on the labour market.”

Watch: Chancellor hails jobs plan as unemployment falls

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