United Kingdom

UK plc 'faces double whammy of Covid and no-deal Brexit'

The UK was today warned it faces a double whammy of one of the worst coronavirus hits of any major economy - while businesses that have ridden out the crisis could be hammered by the failure of EU trade talks.

The latest outlook from the OECD suggests Britain will be affected more dramatically than most other countries, with only Argentina expected to have a deeper recession this year.

The international body has downgraded its forecasts for a swathe of countries, with the UK now facing an 11.2 per cent slump in GDP - far worse than the 3.7 per cent fall in the US, which has been saved by its tech sector.

Separately, the Treasury's OBR watchdog has cautioned that the collapse of Brexit trade talks would hammer sectors that have so far proved resilient to the pandemic. 

The grim picture underlines the woes facing the economy as it wrestles with coronavirus and fundamental shifts in trading terms. 

The latest outlook from the OECD suggests Britain will be affected more dramatically than most other countries, with only Argentina expected to have a deeper recession this year

Last week the OBR's forecasts showed GDP plummeting by 11.3 per cent in 2020 - the largest annual fall since 1709, the year of the Great Frost - although they did not factor in the latest good news on vaccines

The projected downturn in UK plc in the wake of the pandemic is the worst in 300 years

Both Debenhams and the Arcadia group are on the brink of collapse in symbols of the damage being wreaked. 

Meanwhile, Brexit talks appear deadlocked with wrangling over fishing rights and level playing field provisions. 

The OECD warned of a dramatic short-term impact on the economy if the UK fails to reach agreement with the EU, and longer-term scarring on trade and jobs.

In its latest economic outlook, the body said: 'The failure to conclude a trade deal with the European Union by the end of 2020 would entail serious additional economic disturbances in the short term and have a strongly negative effect on trade, productivity and jobs in the longer term.

'By contrast, a closer trade relationship with the European Union than expected, notably encompassing services, would improve the economic outlook in the medium term.'

It downgraded its outlook for the UK economy, forecasting that gross domestic product (GDP) will plunge by 11.2 per cent in 2020 after a contraction in the fourth quarter due to the latest lockdown.

This would see the UK suffer one of the biggest contractions in the G20 group of countries and far more than the 3.7 per cent predicted decline in the US.

The OECD's most recent previous prediction saw a 10.1 per cent fall in UK GDP over 2020.

It now also sees a slower recovery in 2021, with growth of 4.2 per cent and 4.1 per cent in 2022.

Only Argentina, with a 12.9 per cent downturn, is expected to fare worse this year. China is the sole country that is on track to record growth this year, of 1.8 per cent. 

The OECD said there is a chink of light now for the world economy, thanks to the recent positive developments on effective Covid-19 vaccines.

But chief economist Laurence Boon added that the 'road ahead is brighter but challenging', with the recovery set to be uneven across the globe and the potential for a 'severe' hit if vaccines prove ineffective in controlling the pandemic.

She said: 'The current resurgence of the virus in many places reminds us that governments may be forced again to tighten restrictions on economic activity, especially if the distribution of effective vaccines progresses slowly.

'And confidence would take a hit if vaccine distribution or secondary effects proved disappointing.

'The toll on the economy could be severe, in turn raising the risk of financial turmoil from fragile sovereigns and corporates, with global spillovers.'

The OECD is forecasting global GDP to fall 4.2 per cent in 2020 before rising 4.2 per cent in 2021 and 3.7 per cent in 2022.

In a hearing with the Treasury Select Committee today, the OBR said a no-deal Brexit would be at least as damaging as the long-term impact of Covid-19 on the economy.

It added that the economic impact would be 'widespread', meaning few sectors are spared being dealt a blow by the pandemic on one side and a no-deal Brexit on the other.

OBR chair Richard Hughes said: 'Covid affects the non-tradeable sectors of the economy, whereas Brexit affects the tradeable goods sectors.'

He added: 'Were we to leave the EU without a deal, these are the sectors that would be hit hardest by the fact they lose access to a very important market to them, which is the EU.'

The comments come after the OBR warned in its economic and fiscal outlook alongside last week's spending review that a no-deal Brexit could wipe another 2 per cent off the economy next year and lead to a long-term decline in gross domestic product (GDP), a measure of the size of the economy.

In the hearing, OBR member Sir Charlie Bean said: 'The nature of the Brexit shock is one that requires further restructuring of the British economy.

'Some parts that are no longer so profitable will have to downsize, other areas will need to expand as a result of the changed terms of trade with the European Union.

'People will lose their jobs in their declining industries before the new jobs are created in the ones that will expand, so there will be a period where unemployment needs to rise temporarily alongside that necessary restructuring.

'That's pretty much unavoidable with something like Brexit.'

The OBR has predicted that the economy will suffer a 4 per cent drop in output over the long-term from Brexit, even if the UK and EU sign a free trade deal.

The government is forecast to borrow at least £100billion in every year of the OBR's forecast period

The OBR produced three different scenarios, with the downside versions considerably worse than its central expectation

The OBR's estimates show the scale of the damage inflicted on sectors - with accommodation and food businesses worst affected

But it said if the UK is set to revert to World Trade Organisation terms with its largest trading partner, it would reduce GDP by a further 2 per cent in 2021, on top of the havoc wreaked by coronavirus.

Employment would also suffer in the event of a no-deal outcome, it predicted.

The OBR forecasts that unemployment will peak at 8.3 per cent in the third quarter of 2021 if there is no agreement - 0.9 per cent higher than in its central forecast for the quarter.

All of this comes on top of a grim set of forecasts for the economy as a result of the pandemic.

The OBR's forecasts show GDP plummeting by 11.3 per cent in 2020 - the largest annual fall since 1709, the year of the Great Frost.

And £280billion of government support to help the economy through the pandemic will see borrowing soar to a peacetime high of £394 billion - the equivalent of 19 per cent of GDP in 2020-21. 

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