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This briefing was last updated on 13 November. This is a fast-moving crisis, so please be aware that information may have changed since the date of publication. The Library intends to update this briefing.

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

Economic impact

The magnitude of the recession caused by the coronavirus outbreak is unprecedented in modern times. UK GDP was 25% lower during the depth of the crisis in April than it was only two months earlier in February.

Economic activity picked up over the spring and summer, reflecting the opening up of the economy and pent-up demand from the lockdown period. Overall, GDP was 8% lower in September than before the pandemic.

UK GDP level over course of 2020

The economy faces a less supportive environment in the autumn and winter. Coronavirus case numbers increased in September and October and lockdowns have again been introduced across the UK in order to reduce the spread of the virus. This is expected to contribute to a fall in GDP in November.

The reaction of consumers and businesses to the second lockdown and the general high level of uncertainty is also an important factor in determining the economy’s outlook.

Consumers may be unable or reluctant to return to ‘normal’ pre-coronavirus spending patterns. This may be due to health concerns but also perhaps due to concerns over their income. For instance, unemployment levels are expected to rise. Uncertainty may also dampen businesses’ inclination to invest.

Forecasts for GDP point towards a large decline in 2020. The Bank of England in early November forecast UK GDP growth of -11% in 2020 and +7¼% in 2021.

Bank of England GDP forecasts

The Office for Budget Responsibility (OBR) will present its latest outlook for the economy on 25 November, alongside the Government’s Spending Review.

Even when the economic shock of coronavirus does eventually dissipate, the crisis may result in lasting damage to, and/or structural shifts in, the economy.

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 outbreak.

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

The intention of these measures is to keep businesses afloat and, in turn, as many people as possible employed. The measures seek to financially support businesses, workers and the wider public during the outbreak, as well as attempting to reduce the economic uncertainty.

Public finances

The coronavirus outbreak is significantly affecting the public finances. Tax revenues are falling, and government spending is increasing. The Government’s budget deficit (the difference between its spending and revenues) is expected to reach a peace time record in 2020/21. Government debt – the stock of its past borrowing – is increasing as the Government borrows more to fund its spending.

The measures the Government has taken to support businesses, workers and household incomes is likely to cost over £200 billion this year. The longer the crisis continues, the more the cost to government will rise.

The outlook for the public finances in the coming years depends on the strength of the economic recovery. As the economy recovers the Government’s budget deficit will decrease. Tax receipts will recover and spending on support to individuals, workers and businesses will fall. The extent to which the economy recovers will depend on how much ‘scarring’ (permanent damage) there has been.

IFS forecasts of the budget deficit

Note: estimates were produced before the Chancellor’s statement on 22 October 2020.

Further information

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