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UK budget watchdog: Economy could crash 35% due to coronavirus lockdown

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·Senior City Correspondent, Yahoo Finance UK
·3-min read
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A  goat walks past a closed stored, near Trinity Square, in Llandudno, north Wales, Tuesday March 31, 2020. A group of goats have been spotted walking around the deserted streets of the seaside town during the nationwide lockdown due to the coronavirus. (Pete Byrne/PA via AP)
A goat walks past a closed stored, near Trinity Square, in Llandudno, north Wales, Tuesday March 31, 2020. (Pete Byrne/PA via AP)

The UK’s independent budget watchdog has warned that Britain faces a “large (but hopefully temporary) shock to the economy” due to the COVID-19 pandemic lockdown.

The Office for Budget Responsibility (OBR) said on Tuesday that the UK economy could contract by as much as 35% in the second quarter of 2020 if the current lockdown persists for 3 months. In this scenario, unemployment is expected to rise to 10%, compared to 3.9% at the start of the year. That would equate to 2 million extra people out of work.

The OBR said the figures outlined were “a scenario rather than a forecast, based on the illustrative assumption that people’s movements (and thus economic activity) would be heavily restricted for three months and would get back to normal over the subsequent three months.”

The watchdog didn’t make a judgment on whether this was likely or necessary, saying that was a job for the government.

READ MORE: UK unemployment 'will more than double' to 27-year high

The OBR, which was set up in 2010 to audit the Treasury’s budget forecasts, also warned that statistics and models were “more uncertain than usual” due to the fast-moving nature of the COVID-19 crisis.

However, the scenario paints a bleak picture for the UK economy, which has all but ground to a halt due to the pandemic. The government four weeks ago ordered all non-essential businesses to shut and told the population to stay at home as much as possible in a bid to halt the spread of COVID-19.

The government has put in place a package of support aimed at supporting businesses and jobs through the crisis, including state-backed loans for businesses and wage support fo furloughed employees.

The OBR said the spending package would likely push up government borrowing by £218bn ($273bn) this year and total 14% of GDP. Public net debt is forecast to be around £260bn higher by 2024-25, remaining around 10% of GDP.

The watchdog said this spending spree should help protect the UK economy in the long run and drive GDP to “bounce back quickly” after social restrictions are eased.

“The immediate cost of the Government’s actions may be high, but we can be confident that the cost of inaction would ultimately have been much higher,” the OBR wrote.

READ MORE: UK economy could shrink by quarter if lockdown persists

However, the watchdog warned that even billions of pounds of government support may not be enough to prevent permanent damage to the economy if the lockdown persists.

“The longer the period of economic disruption lasts, the more likely it is that the economy’s future potential output will be ‘scarred’ (thanks to business failures, cancelled investments and the unemployed becoming disconnected from the labour market),” the OBR wrote.

Work and pensions secretary Therese Coffey said on Tuesday that jobless claims had already climbed to around 1.4 million, roughly 200,000 more than just a week ago.

The OBR’s warning on long-term damage came a day after Foreign Secretary Dominic Raab said restrictions were likely to be in place for the foreseeable future.

“We still have a long way to go,” Raab said at the daily Downing Street press briefing on Monday. “We don’t expect to make any changes to the measures currently in place at that point, and we won’t until we’re confident as we realistically can be that any such changes can be safely made.”

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