Prospects for the UK Economy

Publication date: 28 Apr 2020 | Publication type: National Institute Economic Review | Theme: Macroeconomics | NIESR Author(s): Lenoel, C; Young, G | Journal: National Institute Economic Review Issue 252 | Publisher: Cambridge University Press
  • Measures to limit the spread of Covid-19 are causing a severe contraction in economic activity of uncertain magnitude. In our main-case scenario, GDP falls by 7 per cent in 2020 and public sector borrowing rises above £200 billion in 2020–21, over £150 billion more than in the OBR's forecast at budget time.
  • The government’s announced measures to limit the long-term economic effect of Covid-19 are estimated to add about £75 billion to the deficit in our main-case scenario. It is estimated that without these measures GDP would have fallen by a further 2 per cent.
  • The cost to the public finances of Covid-19 is easily manageable in our main-case scenario but there are significant risks. A lockdown lasting for more than a few weeks increases the risk of serious long-term damage to the economy. But ending the lockdown too early increases the risk of more premature deaths. The government could improve the trade-off by easing the lockdown in the key ‘upstream’ sectors of the economy, such as manufacturing, construction and non-essential retail, where it is safe to do so, thereby helping the economy as it saves lives.
  • The most significant challenges are likely to come when the lockdown is eased and the government’s supportive measures are withdrawn. Then many businesses could struggle to bear the operating costs of being open while demand and sales are reduced because of the need to maintain social distancing. In those circumstances the government schemes will need to be adapted to prevent unnecessary business failures as the economy recovers.

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