Yesterday, the United Kingdom (UK) announced that it is entering into its largest level of borrowing within its history in a period of peacetime. This sobering statement is a result of the sustained impact caused by the coronavirus pandemic and the continued restrictions and lockdowns imposed nationwide that have directed resulted in economic hardship. Due to this, the UK is expected to experience the largest plummet in economic output in over 300 years.
The Office for Budget Responsibility (OBR) have announced their forecast figures for the economy, in which the British economy is expecting to contract by a whopping 11.3% in 2020 alone. Following on from this year, the OBS expect the economy to grow by 5.5% in 2021, 6.6% in 2022 and 2.3%, 1.7% and 1.8% in each of the respective following years.
British GDP (gross domestic product) will not return to pre-crisis levels way until the fourth quarter of 2022. It is clear to see the large knock-on effect that the coronavirus pandemic has had on the UK economy.
The OBR also announced that the UK’s borrowing is set to reach £394 billion this year, this figure equates to around 19% of GDP. This huge amount is the highest level of borrowing in the history of UK within a period of peacetime. It is expected that this borrowing will decrease to £164 billion in 2021, £105 billion in 2022/3 and plateauing at around £100 billion, which equates to 4% of GDP, for the ongoing forecasted period.
British Finance Minister Rishi Sunak announced in his budget statement this Wednesday that £280 billion in public spending will be utilised to guide the country through the aftermath of the coronavirus pandemic. This is set to include, £18 billion for testing, PPE and vaccines, £3 billion to support the recovery of the National Health Service (NHS), £2 billion on transport, £3 billion to local councils and £250 million to address homelessness.
On Wednesday Sunak stated in the House of Commons “high as these costs are, the costs of inaction would have been far higher, but this situation is clearly unsustainable over the medium term,”.
“We could only act in the way we have because we came into this crisis with strong public finances, and we have the responsibility, once the economy recovers, to return to a sustainable fiscal position.”
Earlier this month in the preliminary figures from the Office for National Statistics (ONS) showed that the UK economy grew by 15.5% in the third quarter. This is its sharpest quarterly expansion since records began, following a record 19.8% plunge in the previous quarter. As you can imagine, the economic impacts have had a huge knock-on effect in all financial markets over the previous year.
In accordance to data compiled by Johns Hopkins University on Wednesday morning, the UK recorded more than 1.5 million cases of COVID-19 and 55,935 deaths. Lockdown is currently being served in England until December 2, after which a nationwide tiering system will be reintroduced.
To avoid a sudden spike in unemployment, the government has already announced the extension of its furlough scheme until the end of March. However, activity is expected to take another hit in the run up to year-end. GDP (gross domestic product) remains 9.7% below the level seen at the end of 2019, according to the ONS. Sunak praised the government’s economic response in his statement, highlighting that the furlough scheme has “protected jobs, supported incomes and helped businesses stay afloat.”
However, the OBR has projected that unemployment will rise to 7.5% (2.6 million people), in the second quarter of 2021, before falling steadily to 4.4% by the end of 2024.
On Wednesday, Sunak announced a further £3 billion for the Department for Work and Pensions (DWP) to deliver a “three-year restart program”. This program is aimed at helping more than 1 million people who have been unemployed for over a year get back into work.
Written by Joshua Kelly