How has Coronavirus Affected the UK Economy?

Updated: Jan 26



The coronavirus pandemic was a major event for the global economy, causing widespread financial disruption. The UK did not escape the effects of coronavirus and the economy has been heavily affected by it. There has been widespread disruption, with lengthy periods of heavy disruption which have pushed businesses in the UK to the brink.


The UK economy was affected by coronavirus as global supply chains were disrupted, government controls affected economic activity, as people voluntarily restricted their movements and spending habits and economic uncertainty affected consumer and business confidence.


For informational purposes, this article summarises the main events which took place in the UK during the pandemic. On top of this, we will show how conditions affected the country’s gross domestic product (GDP). And, furthermore, we will demonstrate how different sectors of the economy were affected as the pandemic progressed and the extent to which they have been able to recover.



A Timeline of the Impact of Coronavirus on the UK’s Economy

The severity of the impact of coronavirus was most keenly felt in 2020 with a 9.8% drop in GDP on the previous year. This is the biggest drop since official records began in 1948. While this is comparable to the Great Depression, many people believe that this could be the biggest drop in GDP that the UK has experienced since the Great Frost of 1709.

This drop-in GDP was largely brought about by the need to restrict people’s activities to halt the spread of the virus.


Recession and the Lockdown of Spring 2020

In the first lockdown, implemented in the UK in spring 2020, GDP dropped by 25% between February and April.


As the seriousness of the threat of coronavirus was realised, the government began to tackle the issue and on March 23rd, 2020 a full national lockdown was introduced. This lockdown forced many businesses to close and consumers were unable to spend money as they had done before. As we all know, this caused a major downturn in the economy and resulted in huge drops in GDP.


The drop in domestic economic activity brought about by the national lockdown was the chief reason why businesses in the UK suffered as a result of coronavirus. While the introduction of government support did help to keep many businesses afloat and many people out of unemployment, the major economic effect came from the restrictions which the nationwide lockdown imposed on economic activity for ordinary businesses.


As well as the effect that lockdown had on the economy, the disruption that coronavirus had on global supply chains also had a big impact. With businesses, such as the car manufacturing industry, unable to source supplies, production was halted. For many businesses, this caused hardship where government restrictions were not to blame. All the main car manufacturing plants in the UK were closed in late March and early April, for example.


Summer of 2020 Economic Recovery

As the number of cases of coronavirus dropped in the summer of 2020, government restrictions were reduced and the economy was able to make a slight recovery. While some areas of the economy experienced little recovery, many businesses which had previously been closed were able to begin trading again in summer 2020. This helped to prevent a worsening of the situation and brought a rebound in GDP between May and October.


Despite the fact that the economy was able to recover to a degree, consumer spending habits were still changed. The public was less inclined to spend money in the ways they had done before the pandemic took hold. There was a major increase in spending which did help many businesses, but economic activity did not recover to previous levels.

Second Wave of Autumn and Winter 2020

This economic recovery was followed by an increase in the number of coronavirus cases and the reintroduction of national lockdown in November 2020. During the lockdown of November, GDP fell by 2.2%. While there was a rebound of around 1% in December, the overall GDP for December was 6.1% lower than it was in February 2020. This gives an indication of the extent to which coronavirus affected the UK economy as a whole.


While lockdown was eased in December, the full lockdown was reintroduced just before Christmas 2020 and stayed for the early part of 2021. Again, this had an impact on the UK economy.


The Lockdown of Early 2021

While the lockdown which was in place up until the spring of 2021 did negatively impact the UK’s economy, many had predicted that the impact would be worse than it actually was. GDP fell by 1.6% in this period, which compares to the Bank of England’s forecast of 4%.


The reason that the downturn was less severe than many predicted can be attributed to the fact that this lockdown was less severe than the lockdown of the previous year. On top of this, some businesses had been able to adapt to the change in circumstances and trade more in spite of restrictions.


The Recovery Since Then

As the lockdown of early 2021 was eased, businesses were able to open up again and since the spring of 2021, the economy has been able to recover. GDP bounced back quickly after the lockdown was lifted and grew steadily over the summer of 2021. After a jump in GDP in March and April, the rate of growth slowed. While it slowed, GDP increased until July. As of July 2021, GDP was only around 2% lower than the pre-pandemic levels of February 2020.


While it may seem that the economy has almost recovered from looking at these statistics, the bigger picture is more complicated. Notably, government debt has increased dramatically as a result of the support that was introduced for businesses. On top of this, the pandemic is still ongoing and the full effects are yet to be completely known.


How Have Different Areas of the UK Economy Been Affected?

As most people are aware, the extent to which the effects of coronavirus have been felt varies by industry. While all sectors of the economy have suffered to some degree, particularly during spring 2020, some have been particularly badly hit.


The sectors most affected are lodging and food, as well as arts and entertainment. Some sectors of the economy continue to produce significantly less than they did in February 2020, before the coronavirus pandemic hit the UK.


Accommodation and Food

The accommodation and food sector was particularly hard hit by a coronavirus. As of July 2021, it still had an output level 7.4% lower than it did before the coronavirus pandemic. The extent to which this sector was affected can be seen in the fact that output dropped by 90.7% in April 2020 and 89.3% in May 2020 compared to February 2020.


Arts and Entertainment

While the arts and entertainment sector didn’t suffer as badly as the accommodation and food sector during the pandemic, it still had a big impact and has had a more lasting effect. Output was over 50% less in May 2020, compared to February 2020, to show the extent to which the sector suffered during the pandemic. As of July 2021, the arts and entertainment sector still had an output level 18.8% lower than it did in February 2020.


Wholesale and Retail Trade

The wholesale and retail trade sector was heavily hit during the pandemic but has managed to bounce back relatively well. The sector dropped to a low point, below February 2020 levels, of 35.3% less during spring 2020. Yet, the output level for July 2021 was 4.7% higher than it was in February 2020. Although this raise can be attributed to seasonal spending habits, many believe that the sector has bounced back fairly well.


Manufacturing

The manufacturing sector has shifted its output levels much in line with the UK economy as a whole. The sector’s output dropped by an average of around 27% between April and May 2020. In July 2021, output stood at around 2.5% less than it did before the pandemic.


Construction

While the construction industry was hard hit at the start of the pandemic, it had recovered to near pre-pandemic levels by July 2021. This is much like the manufacturing sector. The heaviest drop in output for the construction sector came in April 2020, with a drop of 43.6%. As of July 2021, output levels were 1.9% less than they were before the pandemic.


How Have Employment Levels Been Affected?

In previous recessions of a similar size, there has been widespread unemployment. Yet, the schemes which the government introduced to protect workers, such as the furlough scheme, were widely successful and have helped to keep unemployment at low levels.


To give an indication of the extent to which government support was used, there were over 8 million employees in the UK who were furloughed during the first lockdown in April and May 2020. At its peak, on the 8th of May 2020, there were 8.9 million employees in the UK who were on the furlough scheme. As the pandemic has progressed, this number has fallen. As of July 2021, there were around 1.5 million employees still on the furlough scheme. Yet, this number was expected to fall and the scheme ended in September 2021.


Unemployment Figures

During 2020, the unemployment rate rose from 4% to 5.2%, which represents a rise of 400,000 people. While this is a rise, the extent to which it rose was much less than what many people anticipated.


The 2021 economic recovery helped in re-engaging many people in employment, and unemployment had fallen to 4.6% as of July 2021.





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