In the event that the UK lockdown remains in place until June, with some social distancing measures continuing until September, the Office for Budget Responsibility (OBR) predicts that, in the second quarter of 2020, UK GDP will fall by a mammoth 35 per cent.
Even with a strong rebound in the second half of the year, the OBR assumes an annual reduction of GDP in the region of 12.8 per cent.
It is important to stress that this is not a forecast but rather a point of reference for what might happen to the economy if restrictions to business activity persist until September.
There are good reasons to believe that the strict lockdown will be lifted earlier than June and that business as usual can return before September. But that, of course, will depend on how the coronavirus pandemic progresses and what the scientific advice allows.
Given that most models predict a second quarter contraction of between 15 and 25 per cent, we might assume that the OBR’s is a worst-case scenario.
But if this scenario does come to pass and UK GDP does fall at an annualised rate of 12.8 per cent, then it will be the single biggest fall in UK output for at least 100 years.
Such a contraction would be more than double the losses of 2008, where the economy shrank by around 5 per cent.
In addition to these catastrophic GDP projections, the OBR analysis predicts that unemployment will rise by two million to 10 per cent and will decline more slowly than GDP recovers.
Public sector net borrowing, which has risen sharply already to mitigate the short-term impact of the economic crisis, would increase by £218 billion in 2020-21 to 14 per cent of GDP.
This would create the biggest single-year increase in the budget deficit since the Second World War.
Under these assumptions, the national debt would rise to above 100 per cent of GDP throughout the year before levelling off at 95 per cent, up from 85.2 per cent in the financial year ending March 2019.
The only historical precedent for a year-on-year downturn of the magnitude set out in the OBR scenario is 1932 when the US economy contracted by an estimated 12.9 per cent during the Great Depression.
Looking at this information, it is easy to be pessimistic about the future. But even with output shrinking by a third in the second quarter of this year, the OBR estimates that the UK will return to growth in 2021.
It assumes an equally massive 17.9 per cent GDP recovery in 2021, absorbing all of the losses of this year and putting the UK firmly back on the growth path.
It is also worth reiterating that these figures are premised on a scenario, which at the present time is unknown, i.e. when the UK lockdown will end.
And even if total lockdown does last until June, a 12.8 per cent reduction in UK GDP feels like something of an outlier in the context of a growing body of analysis being done by investment agencies, think tanks and financial institutions.
The International Monetary Fund (IMF), for example, forecasts UK GDP to fall by 6.5 per cent in 2020 – almost half the OBR estimate.
But even a 6.5 per cent contraction would be bigger than anything seen in 2008 and indeed the IMF echoes the warning that the world is facing the worst recession since the Great Depression.
Because this whole situation is unprecedented, it is difficult to know how it will play out. Economists across the board have been scratching their heads to try and figure out how to make accurate predictions when there are so many unknown variables.
When will the lockdown end? How will it end? Which sectors will be worst affected? What will happen to global supply chains? How will consumer behaviour change? What does that mean for investment? Will the Government’s business support measures prevent mass redundancies and liquidations?
This is to say nothing of the trajectory of the virus itself. Will there be a second wave of infections? How long will a vaccine take? If you survive COVID-19, are you immune from being re-infected? Will warmer weather reduce transmission of the disease?
With so many questions as yet unanswered, it’s difficult to put faith in any of the projections. But the OBR analysis is striking, not just because of the colossal figures involved but because it comes from a trusted body that provides transparency on the public finances with independent fiscal analysis.
The OBR is about as objective as any organisation of this kind can be, which is why its projection of a 35 per cent contraction in Q2 2020 is attracting attention and concern in equal measure.