Yahoo Finance UK economy may not recover until end of 2022, Treasury forecaster warns
It could take until the end of 2022 for Britain’s economy to return to its pre-coronavirus peak, while government borrowing is expected to surge to £322bn this year in response to the pandemic, the Treasury’s official forecaster has warned.
Dashing hopes for a rapid recovery from Covid-19 after official figures revealed a meagre rebound in May, the Office for Budget Responsibility (OBR) said it would take longer than previously hoped to bounce back, while warning long-term economic scarring was increasingly likely.
Publishing its annual fiscal risks report as ministers relax coronavirus lockdown restrictions to reboot the economy, the OBR said it expected unemployment would rise sharply as the government winds down its furlough wage subsidy scheme.
At least 10% and as much as a 20% of the 9.4m jobs furloughed on the scheme will be made redundant, it said, as state subsidies are reduced from the start of August and removed entirely by the end of October.
Anneliese Dodds, the shadow chancellor, said the OBR analysis showed the government needed to listen to calls from Labour, business and trade unions to offer more support to the hardest-hit companies through the furlough scheme.
“Instead of withdrawing support across the piece, he must target it to sectors where it’s needed most. If he doesn’t act, even more people run the risk of being thrown into the misery of unemployment and our economy will continue to suffer,” she said.
In a downbeat assessment of Britain’s economic prospects, the OBR published three potential scenarios for the road to recovery, with its central scenario for jobs, growth and the public finances significantly more pessimistic than its previous forecasts in April.
The Treasury forecaster said it expected GDP to shrink by 12.4% this year on its central scenario, while warning that the economy in 2025 would be 3% smaller than would have been the case without coronavirus.
After the chancellor, Rishi Sunak, increased spending to cushion the biggest economic shock since records began, it said the government’s budget deficit – the gap between tax income and expenditure – would soar to the highest peacetime level in 300 years, hitting £322bn this year.
Related: Hopes for V-shaped recovery fade as UK economy grows 1.8% in May - business live
Although borrowing costs have fallen in the short term, the watchdog warned a renewed austerity drive or tax increases would be required to restore the public finances to a sustainable trajectory.
Under every scenario, it said unemployment would more than double from pre-Covid-19 levels, hitting a peak of 12% in its central scenario.
The OBR figures do not take account of Sunak’s £30bn spending package announced last week because it was not given the details by the Treasury in time. However, it said each of its scenarios would have been worse if the government had not taken action earlier this year.
Rain Newton-Smith, the chief economist at the Confederation of British Industry, said the latest analysis showed further government support could be required.
“We’re not out of the woods yet – firms continue to struggle with cash flow and weak consumer demand. The chancellor’s summer statement took important action to flatten the curve of unemployment but more may be needed.”
