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This briefing was last updated on 26 February. 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 9.9% in 2020, the steepest drop since consistent records began in 1948.

Annual GDP growth from 1700 to 2020

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. Restrictions were eased, briefly, in December. GDP was 6% lower in December than before the pandemic.

GDP level by month in 2020 compared with pre-pandemic level

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 contribute to a fall in GDP in the first quarter of 2021.

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 contribute to a fall in GDP in the first quarter of 2021.

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. As a result, many businesses face difficult challenges in the near term.

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 4.3% in 2021.

On 25 November, the OBR presented forecasts based on three virus scenarios. In its central scenario, it forecast GDP growth of -12.4% in 2020 and +3.7% in 2021. The OBR will release new forecasts on 3 March at the time of the Budget.

OBR's forecasts for GDP based on three virus scenarios

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 outbreak.

In the UK, many 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.

Many of the schemes designed to support businesses, workers and households during the crisis are set to end in March or April 2021. However, with restrictions to economic activity still in place it seems likely that the Chancellor will extend some of the schemes in Spring Budget 2021. The Budget will take place on 3 March. The Library briefing Spring Budget 2021: Background briefing has further information.

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 may cost around £280 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 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 individuals, workers and businesses will fall. The extent to which the economy recovers will depend on how much ‘scarring’ (permanent damage) there has been.

OBR's forecasts for the deficit based on three virus scenarios

Further information


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