Documents to download

This briefing was last updated on 1 June. This is a fast-moving area, so please be aware that information may have changed since the date of publication. The Library intends to update this briefing.

The coronavirus pandemic has impacted the economy in many ways. From lockdown restrictions shutting down many businesses to limits on mobility, the economic impact has been severe.

Economic impact to date

The magnitude of the recession caused by the pandemic is unprecedented in modern times. GDP declined by 9.8% in 2020, the steepest drop since consistent records began in 1948 and the most in over three hundred years on some estimates.

Annual UK GDP growth since 1700

During the first lockdown, UK GDP was 25% lower in April 2020 than it was only two months earlier in February. Economic activity picked up over the spring and summer, reflecting the opening of the economy and pent-up demand from the first lockdown.

This was followed by a further short-lived lockdown in November, leading to another monthly fall in GDP. Restrictions were eased, briefly, in December. As a new variant of the virus drove up Covid-19 infection rates, stricter lockdowns were again introduced across the UK by early January 2021. This contributed to another fall in GDP.

Economists, however, noted that the economy has adapted well to the lockdowns, with a much smaller decline in economic activity recorded in early 2021, when GDP fell by 2.5% in January, than in the lockdown of spring 2020. The level of GDP was 6% lower in March 2021 than before the pandemic.

UK monthly GDP level over pandemic

Economic outlook for 2021 and beyond

As the economy has gradually reopened, economic indicators suggest a strong recovery is underway. This has led to upgrades to forecasts for GDP growth in 2021.

The average forecast among economists is for GDP growth of 6.5% in 2021, up from 4.8% two months’ ago. The latest Bank of England forecast from early May is for GDP growth of 7¼% in 2021. The Office for Budget Responsibility (OBR) forecasts GDP growth of 5.5% in 2021, although this was published in early March.

OBR GDP forecasts

There is still uncertainty, however, over how strong and sustained the recovery will be, even assuming there won’t be a resurgence of the virus. Much will depend on how strong consumer spending is after the initial post-lockdown period.

The Bank of England expects the level of economic output as measured by GDP to regain its pre-pandemic level by the end of 2021. Less optimistic forecasts don’t expect GDP to reach this level until 2022.

Even when the economic shock of the pandemic does eventually dissipate, the crisis may result in permanent damage, or “scarring”, to the economy. The OBR estimates this will lower the level of GDP by 3% compared to what it would have been without the pandemic, while the Bank of England’s more recent estimate is just over 1%.

Policy response

Governments and central banks around the world introduced policies designed to mitigate at least some of the negative economic impacts from the coronavirus pandemic.

In the UK, numerous policies have been announced by the Government and the Bank of England to support businesses and workers.

These measures intend to keep businesses afloat and as many people as possible employed. They include financial support for businesses, workers and the wider public during the pandemic, as well as attempting to reduce the economic uncertainty.

At the March 2021 Budget, the Chancellor announced Government support programmes, such as the furlough scheme, would continue while restrictions remain in place, and for some support measures to continue into the autumn.

Public finances

The UK’s public finances have been hugely affected by the economic shock of the coronavirus pandemic. The Government’s budget deficit reached a peacetime record in 2020/21, as tax revenues fell, and government spending increased. The measures the Government has taken to support businesses and households are costing around £340 billion across 2020/21 and 2021/22.

UK annual government budget deficit since 1901/02

The pandemic’s effect on future deficits depends on the virus and the strength of economic recovery. As the economy recovers, tax receipts will recover and spending to support households and businesses will fall.

The Chancellor has taken some steps to lower future deficits. For example, the corporation tax rate will increase from 2023/24 and spending plans have reduced.

Government debt – the stock of its past borrowing – is increasing as the Government borrows more to fund its spending. Going into the pandemic, government debt was equivalent to around 84% of GDP, it is now close to 100%.

Further information

Documents to download

Related posts