UK economy at 'critical' point amid threat of second lockdown and disorderly EU exit

Britain can only reach pre-crisis activity levels gradually, says OECD, as economy set for 10% contraction this year

A new study by the UK’s National Institute for Health Research reports that ‘long Covid’ could be a debilitating mixture of four syndromes attacking the body simultaneously. Bloomberg

Britain's economy is at a “critical juncture” and on track for a 10 per cent contraction this year amid the threat of a second Covid-19 lockdown and a disorderly exit from the EU, according to the Organisation for Economic Co-operation and Development.

Decisions made now about management of the Covid-19 crisis and future trade relationships will have a lasting impact on the country's economic trajectory for the years to come.

The UK can only reach pre-crisis levels gradually amid an “exceptionally uncertain” outlook as consumer-facing sectors remain disrupted and rising unemployment and business closures leave scars on the economy, the OECD's latest economic survey of the country found.

This risks exacerbating pre-existing weak productivity growth, inequalities, child poverty and regional disparities, the OECD said, as the country faces a prolonged period of disruption to activity and jobs.

“Ongoing measures to limit a second wave of infections will need to be carefully calibrated to manage the economic impact. The country started from a position of relatively high well-being on many dimensions. But productivity and investment growth have been weak in recent years and an ambitious agenda of reforms will be key to a sustainable recovery,” the report found.

“Leaving the EU Single Market, in which the economy is deeply integrated, creates new economic challenges. Decisions made now about management of the Covid-19 crisis and future trade relationships will have a lasting impact on the country’s economic trajectory for the years to come.”

Like many countries around the world, Britain has been hit hard by the economic fallout of the lockdown and ongoing restrictive measures to curb the spread of the virus. The country's unemployment rate rose to 4.5 per cent in the three months to August, its highest in more than three years, with the number of redundancies increasing by 227,000 over the same period – the most since 2009 –according to the Office for National Statistics.

The UK economy grew 2.1 per cent in August from July, far lower than economist forecasts of 4.6 per cent, at a time when restrictions were at their lowest and government support at its highest.

The Bank of England now expects the jobless rate to hit 7.5 per cent by the end of the year, while analysts expect gross domestic product to rise 2 per cent month-on-month in September followed by no increase at all in the last three months of the year.

The OECD expects Britain's economy to slump 10.1 per cent this year before growing by 7.6 per cent in 2021 when unemployment will average 7.1 per cent.

“While many activities fell sharply during lockdown, some have since picked up substantially as lockdown measures have eased," said the OECD. "Nevertheless, overall demand is set to remain well below previous levels in the coming quarters. Consumer-facing sectors remain disrupted and business and consumer confidence depressed with high joblessness uncertainty about the evolution of the pandemic.”

A resurgence of Covid-19, leading to further lockdown measures would lead to weaker growth, higher unemployment and even greater pressure on balance sheets, the OECD said, with a disorderly exit from the EU Single Market, without a trade agreement, exacerbating the effect on trade and jobs.

“Agreeing a close trade relationship with the EU would support recovery, productivity and employment for both parties,” the organisation said. “While negotiations have focused on maintaining low trade frictions on goods, trade in services is crucial for a service-based economy such as the UK. Following exit from the Single Market, UK-based financial institutions will lose their passporting rights. Keeping close relationships with the European Union will help to limit costs.”

A disorderly Brexit would affect UK sectors differently in the medium term, the OECD said, with motor vehicle and transport, meat and textile sectors the worst hit, and exports falling by over 30 per cent.

The OECD recommends a multifaceted package to support a sustainable recovery post-Covid and raise growth potential, with the supportive fiscal policies already in place “set to hasten the recovery”. But further measures are needed to mitigate scarring.

“The scope for further monetary easing is limited but low interest rates provide fiscal space. A key challenge will be ensuring that people in activities that are lastingly impacted by the Covid-19 crisis are able to move to new activities and do not become detached from the labour market,” the organisation said.

In the March budget, UK finance minister Rishi Sunak committed more than £6 billion ($7.73bn), equating to 0.3 per cent of GDP, of new healthcare funding. The government also put in place a set of economic measures, corresponding to 5.5 per cent of GDP in discretionary spending, to support businesses and households.

The government is now to exiting the emergency employment measures put in place at the height of the pandemic, replacing the Job Retention Scheme, that helped prevent sweeping layoffs during the lockdown, with a six-month wage subsidy programme.

The OECD advised further increases to labour market spending on training and in-work benefits to help displaced, low-skilled and low-income workers. It also said spending on digital infrastructure should be prioritised in deprived areas and that monetary policy should remain accommodative until there are clear signals of price pressures. .

Once the recovery is firmly established, the OECD said Britain should address the remaining structural deficit and put the public debt-to-GDP ratio on a downward path.

The UK borrowed a record £35.9 billion  in August as the cost of combatting Covid-19 took its toll on the country's public finances.