There was a strong rebound in economic activity over the summer. Nevertheless, GDP was still well below its pre-virus level.

New restrictions announced in response to rising virus cases cast a cloud over the economic outlook. In response, Chancellor Rishi Sunak has announced a new wage subsidy scheme and extensions to existing support programmes.

This Insight looks at where the economy is in September 2020, the winter outlook and the Chancellor’s new policy announcements.

Strong economic recovery seen over the summer 

The economy’s recovery from the national lockdown continued in July and August. GDP grew by 6.6% in July, following an 8.7% increase in June as shops reopened and social distancing measures eased.

Overall, GDP was still 12% lower than before the pandemic’s full impact on the UK economy (indicators suggest the shortfall narrowed further in August).

GDP has recovered over half of output lost due to coronavirus

Retail sales have been a bright spot. Sales volumes in August were 4.0% higher than before the pandemic, though the overall increase obscures substantial differences between retail sectors. For example, DIY stores have fared well, while clothing stores have not.

New restrictions cast cloud over outlook 

A member of the Bank of England’s interest-rate setting committee said that June to August was a “sweet spot” for the economy.

This period saw the reopening of ‘non-essential’ stores, the easing of the strict lockdown restrictions, increases in consumer spending and the full impact of the Government’s support measures (such as payments from the furlough scheme).

There are some indications that the summer momentum began to ease in September. For example, the IHS Markit Purchasing Managers’ Index showed growth in business activity slowed in September. This was particularly the case in the services sector.

Business activity as measured by the IHS Markit survey of purchasing managers showed slower growth in September following strong growth over the summer

In addition, card and bank payments data collected by Fable Data point to consumer spending slowing over the course of September, following strong increases in July and August.

With coronavirus cases increasing, tighter localised measures and more restrictive national measures, the economy faces a less supportive environment in the autumn and winter. 

Budget delayed until next year

New national restrictions announced by the Prime Minister on 22 September will have an economic impact, particularly in sectors like hospitality.

It’s likely the measures will remain for several months, with the possibility of further restrictions. How consumers and businesses react will be important to the economic outlook.

Increased uncertainty has already resulted in the Treasury postponing the Budget previously scheduled for November.

The Government’s Comprehensive Spending Review, which sets departmental budgets for forthcoming years, is still currently due this autumn (precise date not yet known). It’s possible it may be scaled back with only next year’s spending levels set out.

Chancellor’s new policy measures 

Against this backdrop, on 24 September the Chancellor announced his Winter Economy PlanThis includes a new Job Support Scheme which will subsidise wages of employees working fewer-than-normal hours.

The Chancellor also:

  • announced an additional pair of (smaller) grants to self-employed workers eligible for the existing SEISS scheme 
  • extended the reduced 5% VAT rate for the hospitality and tourism sectors to 31 March 2021
  • made loan repayment terms more generous to businesses who have borrowed from government schemes such as the Bounce Back Loan Scheme. 

Aim to support viable jobs 

The new wage support programme will begin on 1 November and is less extensive, and less expensive, than the furlough scheme (which ends on 31 October).

The Chancellor stressed the position is “fundamentally different,” to when the original support programmes were introduced. He said: “our economy is now likely to undergo a more permanent adjustment” than thought in March, and “hard choices” need to be faced. 

As a result, the new scheme is designed to, “protect as many viable jobs as we can”. In the press conference following the announcement, the Chancellor said the Government couldn’t sustain the same level of spending seen at the beginning of the crisis.

Government borrowing was estimated at £173 billion over the five-month period from April to August this year. In the whole of the 2019/20 fiscal year borrowing was £56 billion.

Unemployment expected to rise 

The number of people out of work has risen, with the HMRC estimating 700,000 fewer people are on payrolls since the pandemic began.

With the furlough scheme winding down, a key question is how many of those currently furloughed – perhaps still 12% of employees – will either return to work or go on to the new wage-subsidy programme.

Economists expect unemployment to increase, with the Bank of England forecasting (in August) the unemployment rate to rise from 4.1% currently to 7.5% by the end of 2020The average forecast from economists surveyed by the Treasury in September is for the unemployment rate to reach 8% in the final quarter of 2020.

How effective the new wage support scheme is in slowing the rise in unemployment will be play an important role (alongside the spread of the virus) in determining the path of the economy in the autumn and winter.

Further reading

Coronavirus: Largest recession on record but signs of recovery, House of Commons Library, August 2020. 

The UK economy: A dashboard, House of Commons Library. 


About the author: Daniel Harari is a researcher specialising in UK and international economies at the House of Commons Library. 

Photo by Alex Motoc on Unsplash