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This briefing was last updated on 9 April. 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 pandemic has impacted the economy in many ways. From lockdown restrictions shutting down many businesses to limits on mobility, voluntary and enforced, 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.

Annual GDP growth since 1700

During the first lockdown, UK GDP was 24% 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 up 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.

GDP level since the pandemic began

Economic outlook for 2021 and beyond

As a new variant of the virus drove up Covid-19 infection rates in December, lockdowns were again introduced across the UK by early January 2021 in order to reduce the spread of the virus. This is expected to have contributed to a fall in GDP in the first quarter of 2021.

Economists, however, note that data released so far this year show the economy appears to have adapted well to lockdowns, with a much smaller decline in economic activity recorded in early 2021 than in the first national lockdown of spring 2020.

The gradual nature of the Government’s plan for easing restrictions in England – intended to make this the final lockdown of the pandemic – mean that the economy will not fully reopen until the late spring.

Economists differ in how quickly they expect the economy to recover once restrictions are eased. Some expect consumer spending could underpin strong growth while others think an expected rise in unemployment this year will lead to consumers being more cautious. The average forecast among economists is for GDP growth of 4.8% in 2021. The Office for Budget Responsibility (OBR) forecasts GDP growth of 5.5% in 2021.

OBR GDP forecasts

Even when the economic shock of the pandemic does eventually dissipate, the crisis may result in lasting damage or “scarring” to 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 pandemic.

In the UK, numerous 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 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.

Public finances

The coronavirus outbreak has had a significant effect on the public finances. Tax revenues have fallen and government spending has increased. 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 and households may cost around £250 billion in 2020/21 and over £90 billion in 2021/22.

The effect that the pandemic has on future deficits depends on the path of the virus and 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 households and businesses will fall. The extent to which the economy recovers will depend on how much ‘scarring’ (permanent damage) there has been.

OBR forecasts of public borrowing

Further information

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