Economic update: Economy was back to pre-pandemic level before Omicron

The UK economy grew above its pre-pandemic size for the first time in November 2021.

In December, however, Omicron became the dominant variant of the coronavirus in the UK. The more transmissible variant is likely to have slowed the economic recovery during December and January, as people became more cautious and some public health restrictions were re-introduced.

Inflation reached a 30-year high in December, heightening concerns about the rising cost of living.

This Insight discusses the economic effect of Omicron, concerns over the cost of living, and broadly positive news in the labour market. It also puts a date in your diary – 23 March – for the spring economic forecasts.

The UK economy was above its pre-pandemic level in November

In November 2021, the UK economy is estimated to have grown by 0.9%, taking it 0.7% above its February 2020 level. Revisions are common, but according to the ONS, the UK economy was around the size it was going into the pandemic. Of course, the economy would have been larger if there had been no pandemic (or other economic shock).

The ONS measures the economy in different ways, however. Its November monthly measure shows the economy above its pre-pandemic level but it considers its quarterly data the ‘lead estimate of GDP’. This is less timely though; quarterly data for October to December 2021 will be released on 11 February.

As the first UK cases of Omicron were identified on 27 November, the economy was largely unaffected by the variant in that month. Omicron’s economic impact will be shown in December’s data.

What impact has Omicron had?

Covid-19 cases sored in the UK during December, as the Omicron variant became dominant. It is likely to have slowed the economic recovery during December and January but official data will only become available from February. Some public health restrictions were re-introduced during this time, and people became more cautious with their social interactions, particularly ahead of Christmas.

We’ll have to wait for the ONS’s official data to see the effect on the economy. Real time data suggests that the hospitality industry was particularly hit by the latest wave of infections. For instance, 44% of businesses in the accommodation and food services reported an increase in cancellations during the four weeks following 13 December. Credit and debit card spending on socialising (travel and eating out) fell during December.

However, the economy has proven resilient and adaptable to shocks as the pandemic has gone on, with consumers willing to change how they spend their money. A poor period for one industry doesn’t necessarily mean a slow down across the economy. For instance, consumers may have shifted their spending online and towards goods, rather than services.

The cost of living

Concerns over the cost of living, and the squeeze on household incomes, were rising as 2021 ended. Recent data will have done little to ease concerns.

Inflation reached 5.4% in December 2021. This is the fastest rate of price growth since March 1992. The largest contributions to rising prices over the 12 months to December came from transport (such as cost of fuels and second hand cars) and housing and household services (such as water, electricity and fuel). Economists expect inflation to push higher in spring, with energy prices due to jump in April 2022.

Average pay is no longer growing faster than prices. Earnings continued to grow in cash terms in the three months to November 2021, but after adjusting for inflation, there was little to no real-terms growth in earnings.

Cost of living concerns also appear to be affecting consumer confidence. GfK, which measures consumer confidence, suggests consumers are “bracing themselves for surging inflation, rising fuel bills and the prospect of interest rate rises”.

Unemployment is down, but inactivity is up

Employment continued to increase and unemployment to fall, during September to November 2021. Both measures aren’t yet back to their pre-pandemic levels. Employment is over 500,000 below its pre-pandemic level. However, the number of employees on payrolls is above pre-pandemic levels in all regions of the UK. This is a more timely measure, but it doesn’t include everyone in work. For instance, it excludes the self-employed.

Other labour market data are more mixed. The rate of inactivity (people not in work and not actively looking for work) is higher than a year ago and higher than before the pandemic. Recent growth in inactivity has been among those aged 50 to 64 years.

Spring forecast on 23 March

The Chancellor has asked the Office for Budget Responsibility to produce its next forecasts for the economy and public finances for Wednesday 23 March.

In theory, the forecasts will accompany the Chancellor’s Spring Statement, which is meant to be a light touch affair, with no significant announcements over tax or spending. The Chancellor could choose to expand it to more of a budget-style event, should “economic circumstances require it”.

About the author: Matthew Keep is a researcher specialising in the public finances at the House of Commons Library.