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This briefing was last updated on 24 September. 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 of 2020, reflecting the opening up of the economy. This was followed by a rise in Covid-19 cases and further lockdowns during the autumn and winter, leading to economic activity falling again.

The decline was, however, much less severe than during the first lockdown, as consumers and businesses had adapted over the previous year. A strong recovery in spring and early summer 2021 led to a rebound in GDP, which as of July 2021 was 2% lower than before the pandemic.

UK monthly GDP level compared to pre-pandemic level

The pandemic has affected different sectors of the economy to different degrees. Sectors reliant on social contact, including hospitality and entertainment, have been especially badly hit. Some sectors, such as financial services, have fared relatively better.

Economic outlook for rest of 2021 and beyond

After recovering strongly as the economy reopened, economic growth appears to have slowed over the course of summer of 2021.

At first this was linked to the spread of the Delta variant and the large numbers of people required to self-isolate as a result (the ‘pingdemic’). A more persistent factor is the disruption to global supply chains which has led to supply shortages of some goods. Many firms are also reporting difficulty in hiring staff.

Inflation has risen over 2021, partly a result of the supply problems, and is expected to continue to do so heading into 2022. This may cause consumers to become more cautious in their spending and, in turn, rein in economic growth. Another important question is how the end of the furlough scheme at the end of September 2021 will affect the labour market and, in turn, consumer spending.

There is therefore a great deal of uncertainty over the economic outlook and how strong and sustained the recovery will be, even assuming there won’t be a resurgence of the virus that materially impacts the economy.

As of September, the average forecast among economists for GDP growth in 2021 is 6.8%. Expectations rose during the spring and early summer as data showed a strong recovery. In March 2021, the OBR forecast GDP growth of 4.0% in 2021 and it is very likely to revise that higher in its next set of forecasts scheduled to be published alongside the Government’s Budget and Spending Review on 27 October 2021.

OBR GDP forecasts

Even when the economic shock of the pandemic does eventually dissipate, the crisis may result in permanent damage, or “scarring”, to the economy. An estimate from the OBR, published in March 2021, suggests 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 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 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.

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 government spending increased and – to a lesser extent – tax revenues fell. The measures the Government has taken to support businesses and households are costing around £340 billion across 2020/21 and 2021/22.

Public sector net borrowing, % GDP

The pandemic’s effect on future deficits depends on the virus and how much permanent damage it causes to the economy. As the economy recovers, spending to support households and businesses is falling and tax receipts are growing.

Government debt – the stock of its past borrowing – has inevitably increased. Going into the pandemic, government debt was equivalent to around 84% of GDP, it is now close to 100%.

Further information

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