OECD more optimistic on UK this year but warns on second Covid wave

UK economy is recovering quicker than expected from coronavirus carnage, OECD think tank reveals – but warns a second wave could HALVE global growth next year and wipe 15% off stock markets

The UK’s economic crash will not be as bad as thought – but the bounceback will be weaker and a second wave of coronavirus could wreak havoc.

The crumb of comfort emerged in the latest forecasts from the OECD think-tank, suggesting the recession will by 10.1 per cent this year – rather than the 11.5 per cent slump it feared in June. 

However, the outlook for next year was also downgraded, with 7.6 per cent growth, down from the 9 per cent previously expected.

While a swathe of major economies saw similar revisions to their prospects, the OECD cautioned that the situation is incredible volatile.

It delivered a grim assessment of the chaos that would ensue if there is a second wave, suggesting that global growth could be more than halved to as little as 2 per cent – with 15 per cent wiped off the value of stock markets.  

While a swathe of major economies saw upward revisions to their prospects this year, the OECD cautioned that the situation is incredible volatile

Despite being reduced, the estimate for the UK contraction is still among the worst in the G20 group of major powers

Inflation plunged last month as the government’s Eat Out scheme and tumbling air fares suppressed prices.

The CPI measure dropped from 1 per cent in July to just 0.2 per cent in August, according to official figures.

The sharpest fall in years was driven by Rishi Sunak’s discount of up to half price on meals out, but also by lower prices as the travel industry desperately tried to entice customers.

The only major offsetting effect came from higher costs of games, toys and hobbies, according to the Office for National Statistics. 

Inflation has been particularly volatile due to the impact of the coronavirus crisis, but the numbers could reduce pressure on the Bank of England to ease its monetary stimulus or raise interest rates.

The Paris-based think-tank’s interim outlook said the hit to the global economy would be ‘smaller than expected, though still unprecedented in recent history’.

Around the work, the contraction is set to be 4.5 per cent rather than the 6 per cent forecast in June. 

Despite being reduced, the estimate for the UK contraction is still among the worst in the G20 group of major powers.

The OECD said the global recovery next year would be constrained by ‘sporadic local outbreaks’, targeted local restrictions and the likelihood that a Covid-19 vaccine would not be widely available until late in 2021.

It is pencilling in global growth of 5 per cent next year, but warned this could be slashed to between 2 per cent and 2.5 per cent in the event of a widespread second wave of the virus and further lockdowns.

In its downside scenario, it said global equity prices could crash by 15 per cent and non-food commodity prices tumble 10 per cent in the first half of 2021.

The OECD said: ‘A recovery is now under way following the easing of strict confinement measures and the reopening of businesses, but uncertainty remains high and confidence is still fragile.

‘If the threat from the coronavirus fades more quickly than expected, improved confidence could boost global activity significantly in 2021.

‘However, a stronger resurgence of the virus, or more stringent containment measures, could cut 2-3 percentage points from global growth in 2021, with higher unemployment and a prolonged period of weak investment.’

The OECD also said there was a high risk of long-term scarring from the pandemic, with most economies expected to see output at the end of 2021 remain at or below that at the end of 2019 and ‘considerably weaker’ than pre-crisis projections.

The OECD urged governments worldwide to keep fiscal support measures in place for 2021 and ‘avoid premature budgetary tightening at a time when economies are still fragile’.

It also said central banks worldwide should ensure monetary policy remains ‘supportive’ and flexible as the pandemic and economic outlook evolves.

GDP figures due to be released this week are set to show that the UK has entered a technical recession – with two consecutive quarters of contraction. The Bank of England predicts that the downturn will be the worst in a hundred years (chart pictured)

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