The longer the lockdown, the greater the risk of lasting economic damage

The restrictions in place to slow the spread of coronavirus have brought entire sectors of our economy to a standstill.

The Office for Budget Responsibility (OBR) says we now face the prospect of the biggest recession in modern history if the lockdown, which began on March 23, lasts for three months.

Just five weeks ago the OBR was predicting that the economy would grow by 1.1% this year. It now estimates it could contract by an unprecedented 12.8% if the restrictions remain in place until the end of June.

Coronavirus could be the biggest hit to the economy in 100 years. Credit: OBR

In such a scenario the number of people in the UK who are unemployed could more than double to peak at 3.4 million.

And government borrowing in 2020/21 could rise from a forecast £55bn to £273bn as tax receipts collapse.

This is a stark assessment of the potential economic fallout from Covid-19, one that assumes the economic damage is caused not by illness but by the measures imposed to prevent it.

Borrowing looks set to be much higher than predicted. Credit: OBR

The OBR is at pains to point out that this is a scenario not a forecast. Put another way, the OBR is saying a downturn of this scale and pace is plausible not that it is probable - far too much is still as yet unknown to be confident of what happens next.

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The headline figures are grim but at the heart of the OBR’s analysis are two reasons to be hopeful.

Firstly, the OBR assumes that the economy will emerge from this deep freeze largely unscathed and will bounce back strongly and quickly.

Secondly, that it will do so because the OBR also assumes that the financial support the government and the Bank of England is offering businesses and households will prove effective.

The problem with both of these assumptions is that the evidence rather suggests they are being optimistic.

Businesses are complaining that they are struggling to get their hands on the billions of pounds of loans and grants that the Chancellor says is available.

Rishi Sunak has admitted coronavirus will have a serious impact on the economy. Credit: PA

Meanwhile 1.4 million people have made new benefit claims in the last three weeks.

Companies are failing, people are losing their jobs. The government’s bailout schemes need to start working as they were designed to.

The OBR also points out another uncomfortable truth: “The longer the period of economic disruption the more likely it is that the economy’s future potential output will be scarred.”

The government are having to make extremely difficult decisions. By choosing to lock down the economy to save lives ministers know they are causing financial hardship.

And the longer the lockdown goes on the less likely it is that the economic damage will be temporary.

Coronavirus: Everything you need to know