By Jeph Ajobaju, Chief Copy Editor
With millions of pounds spent as stimulus package and counting, companies closing shop and mounting job losses caused by Brexit and coronavirus, recession looms in the United Kingdom that will be worse than that of any other big economy in Europe.
The warning came on Wednesday from the Organisation for Economic Co-operation and Development (OECD), which says the UK economy will be one of the most affected by coronavirus, particular if there is a second wave of the pandemic
A plan to head off the worst-case scenario should include extending Brexit transition period beyond December 31, a deadline Prime Minister Boris Johnson has corralled Parliament to exact into law, deal or no deal.
The OECD said the plunge in economic output in the UK is likely to be worse than that experienced by France, Italy, Spain, Germany, and the United States.
If there is a second wave of coronavirus, the OECD predicts a 14 per cent contraction in British economic output
And even without a second wave of the virus, the OECD stressed, the UK economy will contract by 11.5 per cent in 2020, the sharpest decline due to be experienced by any of the 37 members of the OECD.
“As a service-based economy, the United Kingdom is heavily affected by the crisis,” the OECD said in its latest economic projections. “Trade, tourism, real estate and hospitality are all hard hit by confinement restrictions.”
Policymakers around the world “continue to walk on a tightrope” until a coronavirus vaccine or treatment becomes widely available, the OECD said, but warned that even a comprehensive testing regime may not be enough to prevent a second outbreak.
If there is a second wave of “rapid contagion” later in 2020, the OECD predicts that UK Gross Domestic Product (GDP) will shrink by 14 per cent.
While the UK will be the worst-affected without a second wave, Spain and France will suffer a larger decline in such a “double-hit” scenario, according to the economic outlook.
UK unemployment rate is set to more than double to 10 per cent and remain elevated for the entirety of 2021, the OECD said, warning that the government’s furlough scheme is unlikely to be able to “fully offset” the long-term blow to jobs.
“In the double-hit scenario, a second wave of the virus and new restrictions would put an abrupt halt to the pickup in economic growth in the fourth quarter this year.”
The OECD noted that the UK government “swiftly” put in place a fiscal support package in its economic response, and urged that the measures be kept in place as long as they are needed.
However, the “comprehensive” measures will see the UK’s fiscal deficit climb to at least 14 per cent of GDP this year.
Higher unemployment benefits should be extended into the next financial year, the OECD advised, noting that a “temporary extension” of the Brexit transition period “would help reduce uncertainty.”
“The United Kingdom should make a temporary arrangement to stay in the EU Single Market beyond 31 December 2020 given the pressures firms already face from COVID-19.”
Pointing to the “somewhat later” implementation of lockdown measures, the OECD said the UK had been “relatively hard hit by the COVID-19 crisis.”
The OECD added, however, that the health situation remained under control, in part thanks to a rapid scaling up of National Health Service (NHS) capacity.
In the double-hit scenario, the OECD projected that UK economic growth is expected to recover to 5 per cent in 2021.
But high unemployment will dampen wage growth and subdue consumption, in part because “limited unemployment benefits” may encourage jobseekers to take on lower-paid jobs, it said.
Without an extension to the Brexit transition period, “trade costs will increase and exports will fall in 2021,” according to the projection.
Higher unemployment benefits could support demand during the recovery, while the government should consider extending its furlough scheme in the event of a second lockdown, the OECD advised.
But it said the government should consider temporarily postponing increases to the National Living Wage to support labour demand and boost sectors that could face labour shortages.
The crisis will likely result in “permanent structural shifts in the economy,” and policy should support a more sustainable and more inclusive recovery, the OECD said.
“This could entail adjusting plans for public investment in line with digital, sustainable and inclusive growth targets.”