yesterday’s OBR coronavirus reference scenario has featured prominently in the UK media over the last 24 hours. it has also been widely misinterpreted — it is not a forecast. It is a baseline scenario for assessing future developments and policy actions
The most serious example of misinterpretation apparently comes from Chancellor Rishi Sunak. He is quoted by the BBC as saying yesterday that “The OBR also expects the economic impact of the crisis to be temporary, he said.” (this article is here)
No. What the OBR actually said in their commentary is the that coronavirus lock down will deliver “a large (but hopefully temporary) shock to the economy and public finances“.
Specifically, the OBR assume that the lock down continues for three months and judge that the impact will then be a 35% fall in 2020Q2 GDP over the previous quarter. The also assume (because there is no basis for any different scenario in their modelling) that the measures taken by the UK government work: “They should also help to limit any long-term economic ‘scarring’ – for example, due to cancelled business investment, widespread business failures and the unemployed losing contact with the labour market. Such scarring would both harm future living standards and increase the structural budget deficit.” i.e. their scenario, hopefully assumes that such long term loss of productive capacity does not take place.
the problem, as I have argued regularly on this blog over the past three weeks, is that the measures taken by the UK government are slow and timid (compared both to other countries and to what might have been undertaken here in the UK). Unless there is more support for business there will be long term scarring and the economic impact of the crisis will not be temporary.