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Britain’s economy: less affected by Covid-19 than feared

August 14, 2021

E.ECONOMIC FORECAST is difficult, especially during a pandemic. On Aug. 12, the Office for National Statistics (ONS) reported that GDP grew 4.8% in the second quarter of this year, putting the economy just 2.2% below pre-pandemic levels. The pace of recovery slowed somewhat in July as Covid-19 cases increased. Even so, the official government forecasts from the beginning of the year now look absurdly pessimistic.

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The Office for Budget Responsibility (OBR), a fiscal watchdog responsible for forecasting, issued its latest forecast in March. They were created amid a lockdown and the progress of the country’s vaccination campaign is still uncertain. The watchdog is therefore cautiously forecasting annual GDP growth of 4%. After a quick vaccine rollout, economists now expect annual growth of around 7%.

Since growth is stronger than expected, borrowing is likely to fall well below the OBR forecast. When Chancellor Rishi Sunak set out his budget plans in March, he expected national debt to rise by £ 234 billion (US $ 324 billion or around 10% of GDP) next year. The average forecast from private sector economists is now nearly £ 20 billion less.

The Chancellor will thus find the next OBR forecast due in autumn a pleasant read. Ordering people to stay at home caused an immediate collapse in demand, but this has been reversed as restrictions have been relaxed. Not only has the recovery been faster than expected, but the structural damage caused by the pandemic appears less daunting.

In March, the OBR expected the economy to be 3% smaller by the mid-2020s than it would have been in a world without Covid-19. The pace of recovery calls this into question. What once looked like serious scars can in fact be ugly bruises: not nice to look at, but something that will fade over time.

The 3% drop in Fiscal Watcher assumed a 1% drop due to lower labor supply (as foreign workers returned home during the pandemic) and a 2% decrease due to lower productivity (as work patterns were disrupted). Both estimates now appear questionable. Population estimates have become less reliable during the pandemic, but reports of mass emigration earlier this year now appear to be way off the mark. Productivity projections can also prove to be overly pessimistic. With the Covid-19 restrictions withdrawn, the cost of compliance has come down. Some companies even report that working from home has made them more productive.

The Bank of England now estimates that long-term scarring will account for 1% of GDP. Tax officials expect the OBR to move towards Threadneedle Street. A bigger economy means higher tax revenues and less spending pressures. According to the OBR, a 1% increase in GDP means a decrease in borrowing of 0.7% of GDP after two years.

At the moment, the OBR predicts that the current budget, which does not exclude investments, will be balanced by March 2026. If the fiscal watchdog were to adopt the Bank of England’s estimate of the permanent blow instead, the budget would have a surplus of around 1.5% of GDP by then. The Chancellor stressed the need for tight public spending. In fact, Mr. Sunak may have cash to inject.

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You can find all of our stories about the pandemic and vaccines on our coronavirus hub. You can also find trackers that show the global launch of vaccines, excessive deaths by country, and the spread of the virus in Europe and America.

This article appeared in the UK section of the print version under the heading “Not Too Horrible”

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