A year after Boris Johnson imposed the first coronavirus lockdown, the UK economy stands on the brink of a rapid vaccine-fuelled recovery. But the legacy of the crisis is likely to be felt for some time, and perhaps permanently.
Since the prime minister announced the restrictions in March 2020, the country’s economic fortunes have been tightly linked to the progress in battling the virus, even as households and companies have become much better at adapting to disruption and remote working.
Disease and lockdowns were a powerful combination in creating the worst annual drop in output in 2020 for more than 300 years.
The UK produced 9.9 per cent fewer goods and services than in the previous year, far bigger than any contraction since the concept of gross domestic product was created in the early 20th century and only rivalled by severely harsh winters when the UK was an agrarian society.
It was also the most uneven economic downturn since comparable records began in 1997 with pharmaceutical, research and delivery services growing strongly, while output in travel and hospitality collapsed, reflecting restrictions targeted at client-facing sectors.
Workers in higher-paying jobs, such as professional occupations, largely continued to operate from home, while younger and lower-paid workers were more likely to have lost their jobs or be furloughed.
Yael Selfin, chief economist at the consultancy KPMG, said: “The poorest households have seen the sharpest fall in earnings during the pandemic . . . requiring many to resort to any little safety net savings they had.”
To protect livelihoods, the government responded with an unprecedented £352bn package of measures which pushed the public debt-to-GDP ratio to 97.5 per cent, the highest rate since the early 1960s.
Where we are now?
In January, the value of goods and services produced by the UK economy was still 9 per cent below the pre-pandemic level a year earlier.
This is worse than in many peer countries and while different methodologies complicate the comparison, the Office for Budget Responsibility, the UK’s independent fiscal watchdog, said: “The primary reason that the UK has suffered a greater economic hit from the pandemic is simply that the UK has experienced higher rates of infection, hospitalisations and deaths from the virus than other countries.”
Society has learnt to adapt during the past year, with about half of the businesses in the hospitality and entertainment sector continuing to operate in early 2021, compared with only 20 per cent in the first lockdown.
Consumer spending also shows a milder contraction in more recent months than in the spring, with 35 per cent of retail sales now done online — up 15 percentage points from a year ago.
Workers have largely been shielded from the full force of the recession thanks to the government’s furlough scheme that has protected incomes while output collapsed. Paul Dales, chief UK economist at consultancy Capital Economics, said the job retention scheme had been “remarkable” and “more successful than anyone, probably even the chancellor, imagined”. He added that its success might make it politically unacceptable to allow unemployment to soar in the future.
The full impact of the pandemic has also been clouded by the end of the Brexit transition period, which has contributed to a sharp drop in trade.
Where are we going?
A fast vaccine rollout, falling infections, the extension of public support well into 2021 and the planned reopening of businesses are all pointing to a strong economic recovery later this year, while most of the rest of Europe faces the threat of a third wave.
In the first quarter of next year, the economy will be 12 per cent bigger than it is today, the OBR forecast on March 3.
In the months ahead, much depends on the extent to which consumers start spending again, including the more than £160bn of accumulated bank savings thanks to lower spending on commuting, travel and dining out.
If they spend less, the government will come under pressure to further stimulate the economy and the Bank of England will consider imposing negative interest rates. But pressure will mount for rates to rise if households spend freely, as Andy Haldane, the central bank’s chief economist, expects.
Andrew Goodwin, economist at consultancy Oxford Economics, said excess savings were “in the wrong hands — a large chunk of it sits with wealthier people who are less likely to spend it”.
Despite the strong rebound, the OBR forecast GDP to remain 3 per cent below its pre-pandemic trend in 2024, which means the virus would deal the UK economy lasting damage, with fewer and less productive jobs and weaker opportunities for business. It said these scars would be caused by lower investment, higher unemployment and lower population growth brought on by the pandemic.
Those who think scarring will be lower are counting on the economy returning to normal more quickly. Dales is among the most optimistic on this front, noting that unlike in the financial crisis in 2009, the supply of credit has increased, rather than decreased, and workers maintained ties with their employers. “We are unusual in thinking that there won’t be much scarring at all,” he said.