The UK faces a ‘recession to end all recessions’ with GDP plunging nearly a third this quarter, experts said today – amid warnings the misery will go on as long as social distancing remains in place.
The respected IFS think-tank said the scale of the nose-dive due to coronavirus lockdown will be like nothing seen before, while the NIESR forecast that UK plc will shrink by 25-30 per cent in the current three month period.
Even its optimistic estimate suggested that the economy will not reach pre-crisis levels until the end of 2021.
The dire assessments came after official statistics this morning showed GDP was down 2 per cent in the first quarter of 2020 and plunged 5.8 per cent in March – the largest monthly fall on record.
But although the three-month fall was the worst since the end of 2008 at the height of the credit crunch, it is just the tip of the iceberg as it includes just one week of the full lockdown.
IFS director Paul Johnson said the scale of the downturn was huge. ‘It is a mega-recession. It is a recession to end all recessions, in terms of its scale,’ he told BBC Radio 4’s World at One.
‘It’s just a very different kind of one to ones we have had in the past because it is resulted from a different thing, a pandemic. It has resulted from a different response, government closing part of the economy down.
‘And it should result in a different route out and we hope a faster route out. But we cannot know that it will be a faster route out.’
The NIESR figures are in line with the scenario from the Bank of England that GDP will slump by 25 per cent this quarter before bouncing back. The 14 per cent over the year would be the worst recession in 300 years, since the Great Frost swept Europe in 1709.
And former chancellor Lord Lamont said much of the economy cannot recover until social distancing ends.
‘There are whole sectors of the economy – hospitality accounting for 10 per cent of the labour force, airlines, transport – that simply cannot operate with social distancing profitability,’ he told the House of Lords today.
The bloodcurdling picture came as Rishi Sunak refused to rule out tax hikes and public spending cuts after leaked Treasury documents set out desperate plans to deal with coronavirus chaos.
The Chancellor said the government is ‘thinking about everything’ after the shocking assessment warned of a £300billion body-blow to the public finances and the grim decisions needed to keep the country on an even keel.
Mr Sunak said it is ‘very likely’ that the UK is already in the middle of a ‘significant recession’ as a result of the crisis. In a round of interviews, he said it was ‘premature’ to take decisions on tax and spending, but declined to rule out any measures to bring the country back on track.
The latest extraordinary developments on coronavirus came as:
- The UK has announced 494 more COVID-19 deaths, taking the official number of victims to 33,186 as 3,242 more people tested positive for the virus meaning 229,705 have been diagnosed so far;
- Britons were pictured packed like sardines on trains and buses today and warned that social distancing was ‘next to impossible’ as millions across the country went back to work for the first time after Boris Johnson eased the lockdown;
- Keir Starmer has criticised accused the government of dodging scrutiny by stopping publishing global death comparisons showing the UK is the worst-hit major country apart from the US;
- Mr Johnson has hinted that help could be extended for the self-employed after it was announced that the furlough scheme for staff will stay in place until October;
- A poll has found three quarter of Britons believe it is ‘unacceptable’ for nannies to return to work with families they do not live with, and 73 per cent feel the same way about cleaners;
The NIESR figures are in line with the scenario from the Bank of England that GDP will slump by 25 per cent this quarter before bouncing back. The 14 per cent fall over the year would be the worst recession in 300 years, since the Great Frost swept Europe in 1709
The NIESR forecast that UK plc will shrink by 25-30 per cent in the current three month period (left). Even its optimistic estimate suggested that the economy will not reach pre-crisis levels until the end of 2021 (right)
Boris Johnson (pictured walking his dog Dilyn this morning) last week told MPs he had ‘no intention of returning to the A-word (austerity)’ to get the economy going again
Mr Sunak said: ‘Of course it is my job to think to think about everything but what we are thinking about most and foremost at the moment is protecting people’s health … but also to protect people’s jobs and support business at this time, to make sure we can preserve as much of that as possible for the time when restrictions are lifted and we can get our lives back to normal.
‘That is what is occupying all our time at the moment.’
The options emerged despite Boris Johnson telling MPs last week that he had ‘no intention of returning to the A-word (austerity)’ to get the economy going again. In evidence of the scale of the problems, the government extended its furlough scheme until October yesterday, as surveys suggested a third of firms might never reopen.
There are also concerns that businesses will be asked to pick up part of the costs of furloughed staff from August, even if they are still shut down on government orders. Labour has warned the policy could mean another wave of redundancies.
The Conservatives pledged in their manifesto at the general election last year that the party would not raise the rate of income tax, VAT or National Insurance, and would keep the pensions triple lock.
But the ONS highlighted the dire circumstances, pointing out that the Bank of England’s scenario of a 25 per cent fall in GDP in the second quarter would be ‘nine or ten times the record level of fall we’ve seen’.
Unions raged that imposing more austerity and pay cuts in response to the economic meltdown would be ‘like throwing water on a chip pan fire’.
MPs urged the government not to rush to raise taxes and cut services when the impact of the disease could be a ‘one off hit’. One senior Tory told MailOnline the focus must be on driving the economy, and a massive increase in debt could be sustained as long as the day-to-day budget returns to balance.
‘You don’t pay down the debt, you increase GDP,’ said the MP. ‘In terms of public spending and taxes, don’t make any rush decisions. Get us through the situation, take an analysis, and then take decisions when we have returned to a new normal.’
The March fall is the worst since records began in 1997, while the first quarter drop is the biggest since the UK economy contracted by 2.1 per cent between October and December in 2008 in the recession that followed the financial crisis.
It also compares with zero growth in the final three months of 2019.
But the ONS cautioned there was more uncertainty than normal over its first GDP estimate, given the challenges of collecting economic data amid the lockdown.
And there is far worse pain to come, with the Bank of England last week warning coronavirus could see the economy plunge by a further 25 per cent in the second quarter and fall by 14 per cent overall in 2020 – the worst annual fall since records began.
Asked about the GDP figures today, Mr Sunak told Sky: ‘In some senses they are not a surprise. In common with pretty much every other economy around the world we are facing severe impact from the coronavirus. You are seeing that in the numbers.
‘And that is why we have taken the unprecedented action that we have to support people’s jobs, their incomes and their livelihoods at this time, and support businesses.
‘So we can get through this period of severe disruption and emerge stronger on the other side.’
A paper drawn up for Mr Sunak and seen by the Daily Telegraph said austerity-style policies – including drastic cuts to public spending and welfare – may have to be announced within weeks to boost confidence in the economy.
It could lead to rises in income tax, VAT and national insurance, as well as an end to the pension triple lock guaranteeing the state pension rises each year by the highest of inflation, earnings growth and 2.5 per cent.
New green taxes or levies targeted towards the NHS or social care are also being considered. It said there was a ‘base-case scenario’ of a £337billion budget deficit this year, compared with the forecast £55billion in March’s Budget.
Earlier it emerged businesses could have to stump up half of furloughed workers’ pay even if they remain closed, as Mr Sunak revealed plans to extend the massive job retention scheme until October.
Now the leaked document, dated May 5 and marked ‘official – market sensitive’, says tax rises and spending cuts that would raise between £25billion and £30billion – equivalent to a 5p increase in the basic rate of income tax – would be needed to fund the increased debt.
A paper drawn up for Chancellor Rishi Sunak (pictured today) said the austerity-style policies – including drastic cuts to public spending and welfare – may have to be announced within weeks to boost confidence in the economy
In the worst-case scenario, the deficit would increase to £516billion this year, rising to £1.19trillion over five years. This would need up to £90billion in annual tax rises or spending cuts in the coming years. Even the best-case scenario, in which the economy recovers quickly, would lead to a £209billion deficit. This is described as ‘optimistic’.
The prediction suggests the UK economy could be in its worst state since 1945.
And an independent survey of small firms has found that one in three may never reopen, adding to the Government’s woes.
The survey of more than 5,000 British companies, published by the Federation of Small Businesses, also found that seven in ten of the respondents are using the job retention scheme.
However, one in three employers are considering or have already made redundancies in their workforce, raising concerns over planned changes to the scheme in August.
Mike Cherry, the federation’s chairman, said that the Government support through the furlough scheme, as well as other grants and loans, would need to be carefully tapered away.
‘The economy will not go from zero to a hundred overnight once we’re into the recovery phase. The crucial support that’s on offer needs to be kept under review as we chart a course back to economic recovery,’ he told The Times.
Bosses have warned there will inevitably be mass job losses when employers are asked to start sharing up to 50 per cent of the cost of the government’s furlough scheme in August.
The retail sector, which has seen sales nosedive after shops shuttered, will ‘inevitably’ have fewer store staff going forward, it is feared.
Richard Lim, chief executive of Retail Economics, told MailOnline: ‘There’s no two ways about this there will be fewer jobs in retail as we emerge out of this crisis.
‘There will be administrations that are yet to happen. The government’s support measures are providing a lifeline to keep businesses afloat and preserve cash and continue to operate and allow them the working capital to do that.
He added: ‘For some businesses, they will have some staff on furlough who they will realise that are unlikely to be coming back to the same roles as before, if they have those roles at all.’
Mr Lim added that retailers would likely shift more weight behind online selling and would ‘absolutely try’ to retain store staff if possible, but this could mean fewer hours or job sharing.
The picture in the travel sector looks equally as bleak, with summer holidays abroad all but cancelled for Britons.
Airlines have been forced to furlough thousands of staff as countries around the world enforce flight freezes to stem the spread of the virus.
IAG, the parent company of British Airways, said the Chancellor’s extension to the furlough funding will not plug the enormous loss of revenue in the long-term.
The Treasury document warned that if the economy does not recover soon, the country could be thrown into a 1976-style sovereign debt crisis that could require an international bailout.
Three scenarios, in the forms of ‘L’, ‘U’, and ‘V’-shaped recoveries, were also included in the document to express expectation for the different levels of economic fallout that could be experienced.
In the worst-case ‘L-shape’ scenario the deficit would rise to £516bn by the middle of 2021, and total £1.19 trillion over the next five years. The level of debt would require an estimated £90bn in revenue for the Treasury.
The best-case ‘V-shaped’ scenario, described as ‘optimistic’ in the document, would lead to a £209bn deficit this year.
Mr Sunak is advised that to ‘stabilise debts’ in the base-case scenario he will have to increase taxes or cut spending to raise between £25billion and £30billion a year.
The document says the Chancellor ‘has indicated a preference for accepting a higher but broadly stable level of debt’ after the crisis. A Treasury spokesman said: ‘The Government’s focus is on supporting families and businesses.’
Yesterday, Mr Sunak announced the furlough scheme, which is estimated to cost £60bn, would be extended until October but employers would have to pick up more of the bill from the end of July.
Tweeting following the announcement of the extension in the House of Commons, Mr Sunak said: ‘I won’t give up on the people who rely on the Coronavirus Job Retention Scheme.
‘We stood behind Britain’s workers and businesses as we came into this crisis, and we will stand behind them as we come through the other side.’
Labour has urged Boris Johnson and Rishi Sunak to reject public sector spending cuts as a way of paying off the cost of the coronavirus crisis following reports that measures including tax hikes and a pay freeze are being considered.
The paper said measures including income tax hikes, a two-year public sector pay freeze and the end of the triple lock on pensions may be required to fund the debt.
The document is said to state: ‘To fill a gap this size (in the public finances) through tax revenue risers would be very challenging without breaking the tax lock.
‘To raise fiscally significant amounts, we would either have to increase rates/thresholds in one of the broad-based taxes (IT, NICS, VAT, CT) or reform one of the biggest tax reliefs (e.g. pensions tax).’
The Treasury declined to comment on the report, but it is understood that the document is one of many put together by different teams to discuss ideas about future policy.
Shadow chancellor Anneliese Dodds said: ‘A lack of resilience in our public services, caused by 10 years of underfunding, has made it harder to deal with the challenge of coronavirus.
‘After all our public services and key workers have done to save lives during this pandemic, there must be no return to a society where we lack that resilience.
‘Both the Chancellor and the Prime Minister must urgently make a statement rejecting these plans.’
The Conservatives pledged in their manifesto at the general election last year that the party would not raise the rate of income tax, VAT or National Insurance, and would keep the pensions triple lock.
As Rishi Sunak extended the government’s massive coronavirus bailout to the autumn, businesses faced concerns they could have to stump up as much as half of furloughed workers’ emergency coronavirus pay even if they remain closed.
Workers will still get 80 per cent of wages up to a ceiling of £2,500 a month, and from August there will be ‘flexibility’ for them to go back part-time, the Chancellor told MPs this afternoon.
But from that point firms will have to cover a proportion of wages even if they are still largely shuttered and cannot use their staff, raising the risk that some will choose to make people redundant.
At the daily press conference last night, Alok Sharma, the Business Secretary, was asked whether people in as many as a million of the 7.5 million jobs on the furlough scheme were ‘effectively unemployed but don’t yet realise it’, but he could only respond by listing grants and loans being offered to businesses.
Treasury sources said how the burden is divided has yet to be decided, but suggested the government would foot more than 50 per cent – with the suggestion firms can use money they have received from other sources, including emergency business loans and grants underwritten by the Government. More detailed plans are expected to be published by the end of the month.
One business leader told the FT: ‘Clearly the Treasury is calculating that if employers have a bit of skin in the game they will need to be confident that these jobs really still exist.
‘To be honest, that’s got to happen. If the furlough scheme is paying for jobs that don’t really exist, it’s better to release people into the job market to start looking for other work.’
Hospitality and leisure businesses such as pubs, restaurants, cinemas and gyms will be among the last wave of high street commerce that will be allowed to reopen. The earliest that may happen is July, and that is if there are no setbacks in the lockdown that forces restrictions back into effect.
Kate Nicholls, UKHospitality chief executive, warned the Government that firms in the sector could need to keep receiving the full 80 per cent of salary costs because hotels and restaurants will still be unable to open.
‘The full 80 per cent may need to be extended past July for some businesses in sectors like hospitality that will still operate at much reduced levels of trade, or not yet be able to open,’ she said.
‘Our businesses will need as much warning as possible if they are to be expected to plan ahead for eventual venue reopenings.’
GMB union General Secretary John Phillips said that while the extension was welcomed, but demanded companies be given more details to avoid job cuts.
‘Continued support for the Job Retention Scheme is crucial, but muddled advice on who should be working means many well-intentioned employers, who want to keep their staff furloughed, will find themselves competing with unscrupulous companies who want to drag their staff back before it is safe to do so.
‘The Government needs to be clear, if companies don’t know what’s coming down the tracks we’re going to see job cuts.
‘Don’t underestimate bosses’ commitment to the the bottom line, it’ll send workers to the breadline.’
Gerard Toplass, founder of the BusinessBounceBack campaign and executive chairman of two construction firms, said he expects there to be ‘one million people who are not necessarily going to go back to the job they had’.
The entrepreneur added that businesses want guidance now to help them plan their return to work in a different economy to the one just weeks before.
‘I think it is right that it [furloughing] is being phased out, but the government does need to give people sufficient time so that they can plan properly,’ he said.
‘You have some employers who will clearly be thinking about what their demand is going to look like, and they will be making decisions about that now. Irrespective of what support is out there, they will make decisions that they believe are right for their businesses.
‘I think the Government needs to balance the way it releases businesses, particularly in the retail and hospitality sectors, in a way that allows them to be safe and responsible, but allows them to ‘paddle their own canoe’.’
Experts say the cost to the public purse up to August is now expected to hit £60billion, and the final bill will be even higher.
It is also unclear whether support is being continued for the self-employed, amid rumours that those with profits over £30,000 could be excluded from the help, rather than £50,000 as at present.
Shadow chancellor Anneliese Dodds said: ‘The government must clarify today when employers will be required to start making contributions, and how much they’ll be asked to pay.
‘If every business is suddenly required to make a substantial contribution from the August 1 onwards, there is a very real risk that we will see mass redundancies.’
Rishi Sunak concedes recession is already happening in grim warning of hard times to come as he extends the furlough scheme again
By Jason Groves for the Daily Mail
Rishi Sunak extended the coronavirus job subsidy scheme until the end of October as he conceded yesterday that the UK is already in recession.
In a fresh sign that ministers believe Britain faces a long haul to economic recovery, the Chancellor said it was already clear that the furlough scheme would have to go well beyond its current deadline of the end of June.
Mr Sunak revealed that the scheme, which sees the taxpayer subsidise 80 per cent of wages up to a maximum of £2,500 a month, is already supporting an astonishing 7.5million jobs.
He told MPs that the scheme would continue ‘completely unchanged’ until the end of July – despite warnings it could cost taxpayers more than £80billion.
After that, people who have been furloughed will continue to receive 80 per cent of their wages, but their employer will be asked to make a contribution towards the cost.
Chancellor of the Exchequer Rishi Sunak extended the furlough scheme deadline beyond June, as originally set out, as he conceded the UK is already in recession
The scheme will also be tweaked to allow furloughed staff to start returning to work part-time from as little as one day a week – an idea that has been a key demand of business.
The extension was welcomed by both unions and business last night. The scheme has been accessed by 935,000 businesses since March and has already cost £10billion.
The move came as ministers braced themselves for official GDP figures which are expected to show the economy went into reverse in the first three months of this year, even before the impact of the lockdown was felt.
The job retention scheme is credited with shoring up millions of jobs that would otherwise have gone as the Government ordered the closure of huge swathes of the economy.
Despite this, some 1.8million people have signed up for Universal Credit since the lockdown began.
Asked whether the country faced an inevitable recession, Mr Sunak told the BBC: ‘We already know that many people have lost their jobs and it breaks my heart.
‘We’ve seen what’s happening with Universal Credit claims already. This is not something that we’re going to wait to see, it’s already happening.
‘There are already businesses that are shutting. There already people who have lost their jobs. That’s why I’m working night and day to limit the amount of job losses.’
The Treasury declined to say how much the scheme was now likely to cost but Capital Economics predicted it could be £87billion, while the Institute for Fiscal Studies said it could cost almost £100billion by the end of October.
Last night Mr Sunak suggested the scheme, which will now run for at least eight months, was costing about £8billion a month.
From today, the self-employed will be able to apply for income support dating back to March.
But it is not yet known whether support for them will also be extended. Paul Johnson, director of the Institute for Fiscal Studies, said the generosity of the scheme might mean that some businesses remain closed ‘for longer than is absolutely necessary’.
But he added: ‘Maybe that is a lesser risk than people going back when it’s unsafe.’
Len McCluskey, general secretary of the Unite union, welcomed the extension, while the British Chambers of Commerce said it was a ‘huge help and a huge relief for businesses across the UK’.