The economic recovery that the UK enjoyed over the summer is continuing, but as autumn takes hold and the nights draw in, the outlook is beginning to appear chilly.

With growth faltering, unemployment rising and a resurgence in the number of Covid-19 cases, the economic situation is starting to look increasingly uncertain, and the Government is having to change its response.

This Insight looks at the state of the economy in October 2020, for signs of where it might be headed, and Government action in response.

The economy grew but less than expected

Although GDP continued to grow in August, the recovery in that month was well below the pace economists expected.

Most areas of the economy are showing growth, but there is still a long way to before it reaches pre-pandemic levels. Production output in August was still 6% below where it was in February. Services output was even lower at 9.6% below February levels.

Chart showing that services and production output have both started to recover since their low points in April 2020, but are still well below pre-pandemic levels

The overall shape of the UK’s economy as we enter the winter and Covid-19 cases begin to rise, is starting to look like the “incomplete Vcurrently being forecast by Citibank and reported by the Institute for Fiscal Studies. Under this scenario, the fast recovery seen over the summer is likely over, with much slower growth to follow.

Despite this, there are some sectors of the economy showing strength. Retail sales improved markedly in September, possibly because of consumers stockpiling in case of more stringent lockdown measures. Similarly, Purchasing Managers’ Index data showed that the construction industry is seeing rapid expansion, particularly in housing.

Fastest rise in unemployment on record

Interventions such as the Job Retention Scheme helped the UK to avoid mass unemployment over the summer.

However, as these schemes begin to be replaced with less generous programmes, the labour market is starting to see an impact. The employment rate was down in June to August 2020, compared to the previous quarter. The unemployment rate rose to 4.5%, the highest it’s been in over three years.

Chart showing that the unemployment rate has started to rise, and that youth unemployment is much higher and rising faster

From May to August, 227,000 people were made redundant. This is the fastest rise on record, with the highest numbers of job losses among the self-employed, young people and part-time workers. Research from earlier in the year suggests that women, people from Black, Asian and Minority Ethnic backgrounds and part-time workers have been particularly affected by the pandemic economically.

The Office for National Statistics (ONS) figures show a larger impact than previous reports, partly because the ONS has revised the way it calculates its data.

Government borrowing – and uncertainty – remain high

The recession and increased spending caused by the pandemic means the Government has borrowed unprecedented amounts of money.

In the first half of the 2020/21 financial year, public borrowing reached £208 billion. If it continues at this pace, it could average close to £1 billion per day.

Chart showing that public borrowing is at very high levels, and may average £1 billion per day over the 2020/21 financial year

Total public sector debt is now larger than the annual output of the entire economy, at over 103% of GDP.

The cost of servicing this debt currently remains very low. However, the Institute for Fiscal Studies warns that this level of debt leaves the economy open to future economic shocks.

In this context of economic uncertainty, the Government had to revise its policies, with more generous support announced for areas under coronavirus restrictions. The uncertainty is also making it difficult for the Government to set out firm future spending policy. This was acknowledged in the downgrading of the autumn’s Comprehensive Spending Review, which will now set departments’ budgets for one year instead of the previously planned three.

The Review will conclude in the last weeks of November, and is set to focus on supporting employment, helping public services respond to Covid-19, and infrastructure investment.

Another source of uncertainty at the moment concerns trade, as the negotiations over the UK’s future relationship with the EU intensify. With the transition period ending on December 31, it’s still unclear how the UK will be trading with its largest trading partner from 1 January onwards.

Further reading

Coronavirus: Economic impact, House of Commons Library.

About the author: Philip Brien is a researcher specialising in public spending at the House of Commons Library.

Photo by Liviu Florescu on Unsplash