05-05-2020

How long is it going to take for the economy to recover?

As we are all beginning to realise, the country is likely to be pushed into an unprecedented economic slump due to the Covid-19 crisis. How big the slump will be is not yet known, but predictions are not optimistic.

An independent forecast by the Office for Budget Responsibility (OBR) warned that by June the economy could shrink by a record 35 per cent if there was a three-month lockdown followed by three more months of restrictions. This is just a prediction, but one thing for certain is that the lockdown will have serious economic implications.

When we start to talk about recovery, things are even less clear, as the impact of the current lockdown is unknown. We don’t know how far the economy will fall or how many businesses will be able to cope with continued restrictions when things do begin to slowly return to normal. And of course, there could be more lockdowns to control outbreaks before a vaccine is discovered. 

The government has said it is “not just going to stand by” and let the economy slide. Ministers say they plan to protect jobs, businesses and self-employed people. But there are limits to what the Government can do. The OBR predicts a further rise in borrowing by the end of the year up to £273 billion, which would represent the largest deficit as a share of GDP since World War Two. 

Robert Chote, chairman of the OBR, said that a drop of 35 per cent in the economy would be “the largest in living memory”. The OBR also predicts that unemployment will rise by 2.1 million to 3.4 million by the end of June. This would put the unemployment rate up to 10 per cent; a level not seen since the mid 90s. 

The total economy is set to contract by almost 13 per cent this year. To find an economic shrinkage of that size, you need to go back much further than the 90s or even the Second World War. The last time the UK economy declined by this amount was in 1709 when, again, nature was to blame. ‘The Great Frost’ struck Europe, killing hundreds of thousands and resulting in widespread famine.

Despite all this doom and gloom, the OBR does expect the UK economy to get back to its pre-crisis growth trend by the end of 2020. The OBR also predicts that unemployment will start to fall; easing to around 7.3 per cent by the end of the year.

Looking further into the future, a large amount of public debt will be the economic legacy of Covid-19. Public debt is expected to remain at 84.9 per cent of GDP in four years’ time after peaking at over 100 per cent by the end of this financial year. Whether this will mean a return to austerity remains to be seen. The UK could place a greater emphasis on tax rises to generate revenue, which could see a rise to corporation tax or higher rate income tax.

An independent forecast by the Office for Budget Responsibility (OBR) warned that by June the economy could shrink by a record 35 per cent if there was a three-month lockdown followed by three more months of restrictions. This is just a prediction, but one thing for certain is that the lockdown will have serious economic implications.

When we start to talk about recovery, things are even less clear, as the impact of the current lockdown is unknown. We don’t know how far the economy will fall or how many businesses will be able to cope with continued restrictions when things do begin to slowly return to normal. And of course, there could be more lockdowns to control outbreaks before a vaccine is discovered. 

The government has said it is “not just going to stand by” and let the economy slide. Ministers say they plan to protect jobs, businesses and self-employed people. But there are limits to what the Government can do. The OBR predicts a further rise in borrowing by the end of the year up to £273 billion, which would represent the largest deficit as a share of GDP since World War Two. 

Robert Chote, chairman of the OBR, said that a drop of 35 per cent in the economy would be “the largest in living memory”. The OBR also predicts that unemployment will rise by 2.1 million to 3.4 million by the end of June. This would put the unemployment rate up to 10 per cent; a level not seen since the mid 90s. 

The total economy is set to contract by almost 13 per cent this year. To find an economic shrinkage of that size, you need to go back much further than the 90s or even the Second World War. The last time the UK economy declined by this amount was in 1709 when, again, nature was to blame. ‘The Great Frost’ struck Europe, killing hundreds of thousands and resulting in widespread famine.

Despite all this doom and gloom, the OBR does expect the UK economy to get back to its pre-crisis growth trend by the end of 2020. The OBR also predicts that unemployment will start to fall; easing to around 7.3 per cent by the end of the year.

Looking further into the future, a large amount of public debt will be the economic legacy of Covid-19. Public debt is expected to remain at 84.9 per cent of GDP in four years’ time after peaking at over 100 per cent by the end of this financial year. Whether this will mean a return to austerity remains to be seen. The UK could place a greater emphasis on tax rises to generate revenue, which could see a rise to corporation tax or higher rate income tax.

If you have any concerns about how the current sitution might affect your future wealth then please get in touch on 01246 560 570.

 

 

Photo by Markus Spiske on Unsplash