IRRV Alert - week ending 27th December 2020
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Coronavirus: Economic impact (21 December 2020)
Coronavirus: Economic impact
Research Briefing
Published Monday, 21 December, 2020
The coronavirus outbreak has impacted the UK economy in many ways. The magnitude of the recession caused by the virus is unprecedented in modern times. This briefing examines the economic impact of the crisis to date and outlines the key issues for the outlook. It summarises policy measures introduced to mitigate the economic effects of Covid-19 and details the impact on the public finances.
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This briefing was last updated on 21 December. 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 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 October than before the pandemic.
The economy faces a less supportive environment in the autumn and winter. Covid-19 infection rates increased, and lockdowns were again introduced across the UK in order to reduce the spread of the virus. This is expected to contribute to a fall in GDP in the final quarter of 2020.
The reaction of consumers and businesses to the new lockdowns, but also the approval and rollout of vaccines, are also important factors in determining the economy’s outlook.
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.
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.
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, 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 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 are likely to 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.
Further information
- Library, The UK economy: a dashboard
- Library, Coronavirus hub, containing all Library research on Covid-19
- Library briefing paper, Coronavirus: Impact on the labour market
- Library briefing paper, Support for businesses during the Coronavirus (covid-19) outbreak
- Library briefing paper, Coronavirus business support schemes: statistics