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Every generation has its own reference points, the big events through which lives are lived. The same is true of economists. For them the lows of the economic cycle are remembered by shorthand – the GFC, the dotcom boom, the early-90s recession and so on. As economists contemplate the economic effects of COVID-19 they are having to look much further back in history for precedents. This week’s briefing assesses how UK growth through to the end of next year is likely to compare with the ups and the downs of last 120 years.
We, like many of our peers, assume the UK is in the most unusual of all downturns, combining exceptional severity and brevity. Our base case is that the UK economy will contract by a massive 14% in the second quarter, and then bounce back by 6.0% in the third quarter and 4.0% in the fourth with growth continuing through 2021. This represents an extraordinary degree of volatility relative to trend growth which is widely assumed to be around 1.0–1.5% a year.
The scale of the swing in activity can be most clearly seen in the annual numbers. For 2020 as a whole GDP would contract by 6.8% on our estimates before expanding by 6.5% in 2021. Our forecasts are a little lower than the average of forecasters for this year and rather stronger for next.
A 6.8% contraction in GDP would make 2020 the toughest year for UK growth since 1921, when the economy shrank by almost 10.0%, reflecting the continuing effects of the ending of wartime production and the demobilisation of troops. (The shift to the peacetime economy was traumatic, with the economy shrinking by about 25% between 1919 and 1921.) The likely decline in UK growth this year will probably be greater than in the year of the general strike, 1926, or in the depression of 1931 or the global financial crisis of 2009. (The ‘Great Depression’ hit the US far harder than the UK; the US economy contracted by over 25%, the UK by less than 6.0%, not dissimilar to the effect of the financial crisis of 2008-09.)
But what is widely, if not universally, expected to be a short-lived downturn seems likely to be followed by a bounce in activity in 2021. Our forecast of a 6.5% rise in GDP is the same as 1973, during the so-called Barber Boom, named after the expansionary policies of the then Conservative chancellor Anthony Barber. On this basis 2021 could be the joint strongest year for UK growth since 1927.
A one quarter contraction, no matter how large, followed by a bounce in activity, would leave the UK evading a technical recession, so two or more quarters of negative growth. The definition of a depression is less clear cut. The Economist has suggested that it might usefully be defined as either a 10% contraction in GDP or a three or more year shrinkage in the size of the economy. On our, and many other forecasts, the UK downturn seems likely to meet the first criteria, but not the second.
These are technical matters relating to forecasts which are, themselves, hugely speculative. The latest forecasts for UK GDP this year, for instance, range from a contraction of 0.7% to one of almost 11.0%. GDP forecasts will see huge changes in the coming weeks and months as new economic and health data come in.