Covid-19 could cause UK economy to shrink by 35%, says OBR

The UK’s economy could shrink by as much as 35% in the second quarter of 2020 due to the Covid-19 pandemic, the Office for Budget Responsibility (OBR) has said.

The watchdog is also predicting a 13% drop in annual GDP as a result of the outbreak, which it said would “comfortably exceed” any of the annual falls around the end of each world war or in the financial crisis.

In addition to this, unemployment is expected to rise by more than two million to 10% in Q2, but then decline more slowly than GDP recovers. OBR said policy measures would help support households and companies’ finances through the “shock”.

Public sector net borrowing is also expected to increase by £218bn in 2020-21 relative to the OBR’s March Budget forecast (to reach £273bn or 14% of GDP), before falling back close to forecast in the medium term. OBR noted that it would be the largest single-year deficit since the Second World War.

However, the OBR does expect the UK’s GDP to bounce back quickly in the following quarter.

In a statement, OBR said: “The Government’s policy response will also have substantial direct budgetary costs, but the measures should help limit the long-term damage to the economy and public finances – the costs of inaction would certainly have been higher.”

The OBR was created in 2010 to increase the transparency of the public finances and to provide independent analysis of the fiscal outlook and the uncertainties lying around it.