The UK economy is predicted to shrink by a record 35% in the second quarter as a result of the COVID-19 pandemic, the Office for Budget Responsibility has warned. But investors urged to treat figures with caution.
It said the lockdown measures, introduced in an effort to halt the spread of COVID-19, would substantially raise public sector net borrowing and debt, while the government’s policy response will have substantial direct budgetary costs.
As well as a sharp drop to GDP in the three months to end of June, the OBR has also forecast unemployment to rise by more than 2 million to 10% in the second quarter.
It has made its forecasts based on a three month lockdown, followed by another three-month period when restrictions are partially lifted.
According to the OBR’s assessment of the economic fallout from COVID-19, public sector net borrowing will increase by £218 billion in 2020-21 before falling back close to forecast in the medium term, in what would be the largest single-year deficit since the Second World War.
Public sector net debt will also rise sharply in 2020-21 as a result of lower GDP, higher borrowing and the consequences of the Bank of England’s policy measures. It will surpass 10% of GDP during the year, but end the year at 95% as the economy recovers – significantly above the 77% predicted in the Budget forecast. It will remain 10% of GDP above the Budget forecast in 2024-25.
However, on a more positive note, the OBR said it expected no lasting economic hit.
Adrian Lowcock, head of personal investing, Willis Owen, recommended that investors treat the figures with caution.
Lowcock said: “At this point investors need to be careful of reading too much into the analysis as it is still too early to predict how the UK economy will pick up after the lockdown. A V-shaped recovery looks increasingly unlikely the longer a lockdown lasts.
“Comparisons to the Global Financial Crisis are not as useful as this crisis is structurally very different. The financial system in the UK and indeed other parts of the world is in a much stronger position which means there is greater support for any recovery. Until we see consumer behaviour and clearer employment figures, predicting the economic input is almost impossible.”
Richard Pearson, director, EQi, said that while the OBR’s prediction of a sharp economic decline should come as “no real surprise,” it is a “shocking figure” to see in black and white.
Pearson commented: “Should lockdown restrictions to safeguard public health be extended on Thursday, as is expected, then there is no quick fix to the country’s continued economic disruption. The OBR does hold out hope by saying that conditions will eventually improve, predicting a 25% bounce back in Q3, which is some comfort to investors who have probably seen the value of their investments fall significantly in recent weeks. Though the outlook will remain challenging for some time, it’s important to remember that investing is not about short-term gains, it’s about long-term goals.”
He added: “Keeping a balanced view of your investments and not taking radical steps to buy or sell too much is probably the best course of action people can take in such turbulent times.”
Meanwhile, a Bank of America survey of fund managers found that April is likely to be a peak month for pessimism, with 93% of managers expecting a global recession in 2020.
Just over half (52%) believe economic recovery from COVID-19 will be U-shaped, while nearly a quarter (22%) expect a W-shaped recovery. Only 15% predict a V-shaped bounceback.
Four fifths (79%) of fund managers want corporations to improve their balance sheet, the highest number recorded in 20 years, while just 5% want corporate buybacks, the lowest in 20 years.
