The double whammy
Economists had to assess the expected impacts of Covid-19 with Brexit. Despite the uncertainties involved, in general, this was seen as a double whammy, because the sectors badly hit by Covid-19 were different to those badly hit by Brexit.
Covid-19 affected businesses that provided face-to-face services such as accommodation, food services, transport and other services like entertainment. Social distancing hit them hard.
Sectors with flexible working arrangements and those that did not rely on in-person contact were less badly affected. These included information and communication services, and professional, technical and scientific industries. Similarly, manufacturing and financial services could operate effectively.
The short-term impact of Covid-19 was deeper than the financial crisis of 2007/8, causing a GDP contraction of 9% in the first nine months of 2020. However, economists expected the UK economy to recover faster from Covid-19 than from the financial crisis, but Brexit would cause the UK’s recovery to lag the EU and other OECD countries.
Sector impacts compared
In most sectors, there were marked differences between sector output losses during the pandemic and the expected output losses from a WTO Brexit (see Figure 8.1.1 from the OBR).
Under a WTO scenario, there were only four sectors with comparable output losses: professional services, manufacturing, construction, and information and communication.
Figure 8.1.1: Sectoral output impacts of Covid-19 and WTO Brexit
Combined economic impact
OBR view
OBR estimated a wide range of long-run Covid outcomes for the economy. In the optimistic scenario, the economy would return to its pre-pandemic state. The pessimistic scenarios were for long-run scarring (the term economists use for permanent damage) of between 3% and 6% of GDP (see Figure 8.1.2). The wide range of potential outcomes shows they were very uncertain: how long would lockdowns last? would a more dangerous variant evolve? would a successful vaccine be developed?
The potential Covid-19 outcomes would be on top of the effects of Brexit (a thin FTA would reduce long-run UK GDP by 4% and a WTO scenario, or ’no deal’, by 5.5%, compared to continuing in the EU). The OBR’s central forecast assumed a thin FTA.
Figure 8.1.2: Covid and Brexit outcomes for UK economy (source: OBR)
LSE view
The LSE took a simpler approach and put the government’s view of the long-run impacts of Brexit alongside the BoE’s less pessimistic view of the impact of Covid-19 (see Figure 8.1.3).
They assumed that the 1.7% drop in GDP from Covid-19, expected by the BoE for 2022, would continue permanently on top of long-term scarring from Brexit, either with an FTA or ‘no deal’.
Figure 8.1.3: Forecast shocks to UK GDP (source LSE)
