Sky’s Ed Conway says the OBR’s crystal ball foresees a hugely damaging picture for jobs, whatever the scenario.
This might sound improbable, but just over a decade ago many people were bemoaning the fact that economics had become so boring.
Inflation was low, growth was stable and for a period the fashionable thing to say was that the technocrats had triumphed: the era of boom and bust was over.
But, as the Office for Budget Responsibility (OBR) has pointed out, we have now had two “once-in-a-lifetime shocks” in the past decade or so.
There are plenty of differences between the financial crisis and what we’re going through now – some good, some bad.
Was today the day the dream of a V-shaped recovery truly died?
First the @ONS said growth didn't rebound as much as hoped in May.
Now the @OBR_UK paints a central scenario showing we won't be back to 2019 levels of GDP til late 2022. And may NEVER return to the pre-COVID GDP path pic.twitter.com/J4ZXjNzRLG
— Ed Conway (@EdConwaySky) July 14, 2020
But the overarching lesson from 2008 and what followed is that early expectations for a quick bounce-back to normality are often wildly overoptimistic.
Back then a lot of people expected a v-shaped recovery, but it never materialised. Indeed, it took about seven years for gross domestic product per head to get back to where it was before that crisis hit.
We are going through the same kind of realisation right now.
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Early on when COVID-19 hit, a lot of economists presumed that there would be a short, sharp shock and then it would be back to the races.
The very first scenario produced by the OBR showed precisely that – an enormous fall in GDP followed by an enormous rise, leaving the size of the economy a year or two from now precisely where it would have been had the virus never happened at all.
That seemed optimistic even then. For one thing, much will depend on unpredictable stuff like whether there is a vaccine or indeed a miracle cure to COVID-19.
For another, such v shapes are incredibly rare in economics, especially when so many people face the prospect of losing their jobs. Anyway, no-one really knows what’s going to happen next so any confident-looking forecasts should be treated with a healthy spoonful of salt.
Perhaps in mind of all that, the OBR produced on Tuesday not one but three scenarios on what might happen next.
None of them are particularly enjoyable, since they all involve an almost unprecedented fall in economic growth and a rise in unemployment to levels last seen in the 1980s.
But what’s striking is that that previous scenario with the v-shape has now become the “upside” scenario and the “central” scenario, which the OBR implies is rather more likely, now has far less of a v-shape.
Indeed, according to Sir Charlie Bean of the OBR, the upside scenario sees the economy taking a 2% cumulative hit, the central scenario a 6% hit and the downside scenario a 10% hit.
That 10% hit is about the same dent left in the economy by the financial crisis.
Of course, a deeper recession will mean a deeper impact on the public finances. Indeed, the OBR reckons that we are facing a potential deficit this year of over £370bn – the highest since the Second World War.
Some of that is down to the fall in tax revenues and rise in unemployment support – but an even bigger chunk is down to the radical support measures put in place by the chancellor, including £50bn or so in the economic statement last week.
So: potentially a similar dent on growth to the financial crisis, and a bigger dent on the public finances than the financial crisis.
But this recession is likely to feel very different from the financial crisis in at least one crucial way.
Whereas that crisis saw most of the pain doled out in terms of squeezed wages, with households facing the biggest real terms fall in their earnings since the Napoleonic era, this time around the pain will manifest in the loss of jobs.
The OBR scenarios show that even in the most optimistic scenario unemployment will rise to nearly 10% – far higher than the 8.5% peak in the financial crisis. The central scenario sees the jobless rate rising to 12%, meaning around 3.5 million people being out of work. The more pessimistic scenario sees unemployment hitting four million.
Britain has not faced this kind of recession – a jobs recession – since the early 1980s.
It will feel far more intense even than the aftermath of 2008, since such recessions touch more people more directly. And since job losses tend to cause more permanent damage than other economic phenomena, there is a chance it drags on economic growth for some time to come.
Now, all of this is still speculation. But as each new datapoint emerges and each story of a company cutting jobs is broken, it is becoming clearer that those early analyses of the economic impact of COVID-19 were too optimistic.
Hopefully the news on the economy will improve – much as the news on the health impact of the virus itself has improved since those dark days of April and May. But for the time being the outlook is not promising.