Rolling coverage of the latest economic and financial news
- Latest: OBR publishes report into UK fiscal risks
- OBR: national debt more vulnerable to rising inflation
Earlier:
- Introduction: German factory orders slide 3.7% in May
- Economists: global supply shortages biting
- Vauxhall announcement on Ellesmere Port expected
The pandemic has caused the largest and most synchronised peacetime shocks the world economy has faced since the Great Depression of the 1930s, the OBR points out…
The global economic downturn brought about by the pandemic has been the worst since the Great Depression of the 1930s. World GDP fell by 3.3% and almost 90% of economies experienced a decline in output in 2020.#OBRfiscalrisks pic.twitter.com/3dYcLUpkeT
The UK experienced one of the deepest recessions among advanced economies, with output falling almost 10% in 2020. This was due to being relatively hard hit by the virus, spending more time under stricter restrictions, and our large share of social consumption in output. pic.twitter.com/F4pMTBLzdj
However, the economy also proved to be surprisingly adaptable and resilient as the pandemic unfolded, with each successive lockdown taking less off output.#OBRfiscalrisks pic.twitter.com/1z44oawZjw
This economic resilience was thanks in part to a fiscal policy response unprecedented in scale and scope in peacetime. According to IMF, the UK’s rescue package amounted to £354 billion in total and was the third largest among 35 advanced economies after the US & New Zealand. pic.twitter.com/Lc79faCnVM
The arrival of two ‘once in a century’ events since 2000 suggests that the risks facing advance economies are rising, the UK’s Office for Budget Responsibility warns.
That includes extreme weather, pandemics, and cyber attacks, they say, in today’s Fiscal Risks report:
The arrival of two major economic shocks in quick succession need not constitute a trend, but there are reasons to believe that advanced economies may be increasingly exposed to large, and potentially catastrophic, risks. While the threat of armed conflict between states appears to have diminished in this century, the past twenty years have seen an increase in the frequency, severity, and cost of other major risk events, from extreme weather events to infectious disease outbreaks to cyberattacks.
And estimates from major insurers and others of the amount of global GDP at risk from these and other potentially catastrophic risks have been rising steadily. This appears to reflect a combination of the increased frequency and severity of some anthropogenic risks (such as climate change and cyberattacks), growing numbers of people living and working in greater proximity to the sources of those risks (such as floodplains and isolated ecosystems), and deepening global interconnectedness (through travel, trade, finance, and the internet).
As countries’ exposure to large, and potentially catastrophic, risks increases, so do the associated risks to their public finances. This is because such risks are not only more disruptive to the economies that generate governments’ revenues but also because they are more likely to overwhelm private risk management and insurance mechanisms, prompting governments to step in as insurer of last resort.
This may be particularly true in an era when economic shocks are more severe, financial institutions and firms are more leveraged, and monetary policy is more constrained.
