Why will coronavirus hit the UK economy hardest?

Analysis: The nature of our economy and our approach to tackling the virus both play a part, writes Ben Chapman

While all countries have been hit hard by coronavirus, the UK economy is being battered more than any other developed country (AFP/Getty)

£3,833.

That is the estimated cost per person in the UK of the coronavirus pandemic this year in terms of lost output, according to the Organisation for Economic Cooperation and Development (OECD).

Collectively, it amounts to or about £253bn – or 11.5 per cent of all the goods and services the UK produces in a year.

While all countries have been hit hard by coronavirus, the UK economy is being battered more than any other.

If this forecast turns out to be accurate and the pandemic continues to play out along the trajectory it is currently travelling, the UK will have the worst death toll in the developed world and the most badly affected economy.

It must be emphasised that making any economic prediction right now is a risky business. But why is the UK potentially facing such a catastrophic outcome?

The structure of our economy, which is dominated by the services sector, does not help. Some 80 per cent of economic activity is services in this country, more than most other nations.

This covers a huge range of industries from financial services like accountancy to pubs and hairdressers.

While a lot of professional services can carry on remotely it is the nature of many service industries that they require human contact, which has obviously been severely restricted for almost three months.

Sectors like tourism and hospitality, which have been among the most severely affected by the lockdown, are important to the UK economy. Other nations expected to take the biggest economic hit from Covid-19, like France, Spain and Italy, also have big hospitality and tourism sectors.

But, in his speech after unveiling the research, the OECD's secretary general Angel Gurria, also drew a link between the severity of the pandemic and the size of the economic impact.

While no direct correlation can be drawn, it is striking that the two countries that will be least badly hurt, according to the OECD, are China and South Korea. Both of these countries manufacture a lot of goods and are less dependent on the services sector, but they also got the virus under control early, reducing case numbers to almost zero, with systems in place to track and trace any new flare-ups.

The contrast with the UK is, unfortunately, stark. We have one of the highest death tolls per capita in the world and our track and trace system is not due to be at full capacity until September. Professor Neil Ferguson, a former member of the government’s scientific advisory group, said this week that locking down a week earlier would have halved the UK death toll.

It is also becoming increasingly clear that it might have greatly lessened the impact on the economy, businesses and jobs.

And now, the UK is opening up swathes of the economy, apparently because ministers believe that it will protect jobs. As the OECD’s figures show, this risks having the opposite effect, and a second peak will kill more people and have a devastating impact on livelihoods.

The UK’s companions at the bottom of the economic performance league table, France, Spain and Italy, have had some of the highest death tolls. However, they have all reduced case numbers far below the 17,000 daily infections estimated by Public Health England. So the risk of a second peak and the further hit to GDP that the OECD forecasts is much greater here.

For Simon Wren-Lewis, an economist at Oxford University, the problem is one of ideology at the heart of government which demonises state interference with the economy.

He tells The Independent: “A lockdown is a very extreme form of state interference. This leads them to associate the recession with the lockdown, rather than the pandemic.”

We may have to wait a long time to find out the government’s reasoning behind waiting to implement the lockdown and now easing it, contrary to the advice of many epidemiologists. But what seems clear is that ministers see a trade-off between the economy and tackling the public health emergency.

The OECD’s projections, and the words of its secretary general Angel Gurria, point to the opposite conclusion: That the economic catastrophe and the health impacts of the virus are deeply intertwined. You cannot tackle the former without first suppressing the latter.

We will find out very soon which of these approaches is right.