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This briefing was last updated on 17 December. 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.

Omicron variant

The surge in Covid-19 cases seen in December 2021, caused by the spread of the Omicron variant of coronavirus, has led to the UK Government and the devolved administrations to introduce restrictions to limit transmission of the virus.

The economic impact of these measures needs to be considered alongside factors such as changes to consumer confidence and behaviour, as well as effects linked to rising numbers of people having to self-isolate.

At the time of publication, early evidence suggests negative economic effects are already being felt. This includes a decline in retail footfall and cancellations of bookings in the hospitality sector.

A closely-watched business survey, the IHS Markit purchasing managers’ index, reported a steep drop in spending on services by households. The survey, conducted 6-14 December, also showed private sector growth expectations for the coming year were at their lowest since October 2020.

There remains a great deal of uncertainty over the path of the Omicron wave and by extension its economic impact. The Bank of England reduced its expectations for GDP in the coming months due to the impact of the Omicron variant. It also raised interest rates from 0.1% to 0.25% in response to annual consumer price inflation rising to 5.1% in November 2021.

Economic impact to date

The magnitude of the recession caused by the pandemic is unprecedented in modern times. GDP declined by 9.7% in 2020, the steepest drop since consistent records began in 1948 and equal to the decline in 1921 on unofficial estimates.

UK annual 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 2021 led to a rebound in GDP, although growth slowed in the summer and autumn. As of October 2021, GDP was still 0.5% lower than before the pandemic.

UK GDP level compared with 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 2022 and beyond

As well as the Omicron variant, a number of other important factors will shape the economy in 2022 and thereafter.

One of these is inflation, which has risen over 2021. This was partly a result of the disruption to global supply chains and a surge in energy prices. High inflation levels will squeeze household budgets and, potentially, reining-in economic growth.

UK consumer price inflation rate

As of December, the average forecast among economists for GDP growth in 2021 is 7.0%. GDP growth forecasts for 2022 are around 5%, although they have been scaled back even before the Omicron wave started. In October 2021, the OBR forecast GDP growth of 6.5% in 2021 and 6.0% in 2022.

Even when the immediate 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 October 2021, suggests this will lower the level of GDP by 2% compared to what it would have been without the pandemic.

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 Government’s package of support for businesses, households and public services is costing around £315 billion.

UK budget deficit, % of GDP since 1901

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. The Chancellor has announced tax rises, which will bring future deficits down further.

Government debt – the stock of its past borrowing – has inevitably increased. Going into the pandemic, government debt was equivalent to around 80% of GDP, it is 95% of GDP.

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