Coronavirus: UK recession to be worse than France, Italy, Spain, and Germany, warns OECD

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A view of the City of London skyline before sunset. (Photo by Yui Mok/PA Images via Getty Images)
If there is a second wave of coronavirus, the OECD predicts a 14% contraction in economic output. (Yui Mok/PA Images via Getty Images)

The UK’s economy will be one of the most affected by the coronavirus pandemic, the Organisation for Economic Co-operation and Development (OECD) warned on Wednesday, with the plunge in economic output set to be worse than that experienced by France, Italy, Spain, Germany, and the US.

If there is no second wave of the virus, the OECD said that the country’s economy will contract by 11.5% in 2020, the sharpest decline due to be experienced by any of the 37 members of the organisation.

“As a service-based economy, the United Kingdom is heavily affected by the crisis,” the OECD said on Wednesday in its latest economic projections. “Trade, tourism, real estate and hospitality are all hard hit by confinement restrictions.”

Noting that policymakers around the world “continue to walk on a tightrope” until a coronavirus vaccine or treatment becomes widely available, the OECD warned that even a comprehensive testing regime may not be enough to prevent a second outbreak of the virus.

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If there is a second wave of “rapid contagion” later in 2020, the OECD predicts that UK gross domestic product (GDP) will shrink by 14%.

While the UK will be the worst-affected without a second wave, Spain and France will suffer a larger decline in such a “double-hit” scenario, according to the economic outlook.

In such a scenario, the UK’s unemployment rate is set to more than double to 10% and remain elevated for the entirety of 2021, the OECD said, warning that the government’s furlough scheme is unlikely to be able to “fully offset” the long-term blow to jobs.

“In the double-hit scenario, a second wave of the virus and new restrictions would put an abrupt halt to the pickup in economic growth in the fourth quarter this year,” the OECD said.

Commending the country’s economic response, the OECD said that the UK government “swiftly” put in place a fiscal support package, arguing that its measures should be kept in place as long as they are needed.

The “comprehensive” measures will see the UK’s fiscal deficit climb to at least 14% of GDP this year, however.

Higher unemployment benefits should be extended into the next financial year, it said, noting that a “temporary extension” of the Brexit transition period “would help reduce uncertainty.”

“The United Kingdom should make a temporary arrangement to stay in the EU Single Market beyond 31 December 2020 given the pressures firms already face from COVID-19,” it advised.

Pointing to the “somewhat later” implementation of lockdown measures, the OECD said that the UK had been “relatively hard hit by the COVID-19 crisis.”

It nonetheless noted that the health situation remained under control, in part thanks to a rapid scaling up of National Health Service capacity.

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In the double-hit scenario, the OECD said that UK economic growth is expected to recover to 5% in 2021.

But high unemployment will dampen wage growth and subdue consumption, in part because “limited unemployment benefits” may encourage jobseekers to take on lower-paid jobs, it said.

Without an extension to the Brexit transition period, “trade costs will increase and exports will fall in 2021,” according to the projection.

Higher unemployment benefits could support demand during the recovery, while the government should consider extending its furlough scheme in the event of a second lockdown, the OECD advised.

But it said that the government should consider temporarily postponing increases to the National Living Wage to support labour demand and boost sectors that could face labour shortages.

Noting that the crisis will likely result in “permanent structural shifts in the economy,” the organisation said that policy should support a more sustainable and more inclusive recovery.

“This could entail adjusting plans for public investment in line with digital, sustainable and inclusive growth targets,” it said.