OBR Warns Of 35% Hit To UK GDP

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Investors are digesting the latest UK economic forecasts this week, which make for a bleak reading.

The UK’s independent tax and spending watchdog, the Office for Budget Responsibility (OBR) has warned that UK GDP could fall by 35% over Q2 as a result of the COVID-19 lock-down.

UK to Extend Lock-down Into May

The UK government is due to extend the current lockdown this week. According to Dominic Raab, currently standing in for Boris Johnson, this extension will be up for review on May 7th.

OBR has forecast that the economy will rebound as soon as the current restrictions are lifted. However, there is still a great deal of uncertainty over the timeline for reversing the lockdown, This also raises downside risks for the remainder of the year.

Chancellor Rishi Sunak was quick to comment on the report. He stated that believes it is vital the UK government is “honest with people about what may be happening in our economy”.

Sunak warned that the lock-down “will have serious implications for our economy.” He cautioned:

“These are tough times, and there will be more to come”.

UK GDP to Fall 12.8% on the Year

The OBR’s forecasts are in line with its base-case scenario of a 3-month initial lockdown, followed by 3 months of partial restrictions.

However, once restrictions are lifted, OBR projects that the economy will begin to recover. That said, the pace of the recovery has questions hanging over it.

In terms of an annual figure, OBR forecasts UK GDP to fall 12.8% this year.

IMF Slashes Growth Forecasts Also

These projections echo the latest set of forecasts from the International Monetary Fund,

Also released this week, IMF forecasts say UK growth will fall by 6.5% over the year. They also warn that global growth will fall 3% on the year.

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Dire UK Labour Market Forecasts

The OBR also gave a worrying set of forecasts for the UK labor market.

Under the current scenario, OBR sees unemployment rising by a further 3.4 million up to June, with the unemployment rate hitting 10% before ending the year around 7%.

However, expectations are for the unemployment rate to remain high through to 2023 before falling back to around the 4% mark.

Commenting on these projections, Chancellor Rishi Sunak warned that the government would not be able to save every job and household, but he did say:

“Our planned economic response is protecting millions of jobs, businesses, self-employed people, charities, and households”.

GBPUSD Testing Major Level

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Despite the bleak outlook from the government, GBP continues to rally against the dollar here. Price is now retesting the 1.2605 level, a major pivot for GBPUSD.

If price can hold above this level, focus will be on a further move higher. The 1.32 level is the next key structural resistance to note, ahead of the bearish trend line and 2019 highs above.

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