In 2020, the UK economy was hit by the greatest annual decline in 300 years due to fallout from the pandemic. It suffered a record 9.9% slump, the greatest annual contraction since the Great Frost of 1709.
Examining the unemployment rate:
The most recent unemployment rate from September to November was 5% according to the Office for National Statistics (ONS). This is an increase of 0.6% over the previous three months and means that 1.72 million people were unemployed. Most significant is the record number of redundancies which reached 395,000 from September to November.
While the government has set out plans to extend the furlough scheme, which was due to end in October, predictions for the unemployment rate remain alarming. According to the Office for Budget Responsibility (OBR), the unemployment rate is likely to reach 2.6 million in the middle of 2021, which accounts for 7.5% of the working-age population. The Bank of England made a similar prediction, stating that it is likely to go as high as 7.7%, and worryingly, there is a slim chance that it could rise to 10%.
What has the UK done to mitigate the damage?
Early attempts to boost the UK economy such as the Eat Out to Help Out scheme was met with mixed success because it may have aggravated the virus.
Borrowing has been another contentious solution to bolster the economy. The UK government borrowing hit £8.8bn last month, the highest January figure since records began in 1993, reflecting the cost of pandemic support measures. The government borrowing has now hit £270.6bn, according to the ONS which published the data, and is set to reach £450bn this third lockdown which would be the biggest deficit since the Second World War.
The effect of this is that the Chancellor, Rishi Sunak, is now faced with conflicting pressures. On the one hand, the level of borrowing is a concern and can have a devastating impact on future generations. The usual response to rectify a situation of this nature is to increase tax and slow down government spending. However, the pandemic requires a different approach because doing this would slow down the economy.
Due to the pressure to keep supporting the economy, the Chancellor may have no alternative but to continue borrowing.
How will the UK economy recover?
A rapid rollout of the vaccination programme across the UK means that there is hope that the UK economy will recover sooner than anticipated.
The opinion is divided on what a post-COVID economy will look like for the UK, or at least how long it will take to recover. Whilst some believe that the UK economy will take more than two years to recover to its pre-COVID level, others are more optimistic.
The Bank of England has predicted a spending spree, opining that the nation will be keen to spend the money they had been saving. Andy Haldane, chief economist for the Bank of England has predicted in an article for the Daily Mail that “enormous amounts of pent up financial energy [is] waiting to be released.” He has described the UK economy as a “coiled spring,” predicting that when restrictions begin easing, consumers will spend. This may be in cinemas, restaurants and non-essential in-store shopping.
What does a post-covid economy look like? Examining the trends
While Haldane may be right in his prediction, it is uncertain whether the financial release will occur in the same manner as in a pre-covid world.
In retail, trends towards online shopping do not appear to be slowing down. While many bricks and mortar high street shops have been forced to close their doors permanently, Amazon is set to build a £205m “Mega Shed” in Dartford. While the “Mega Shed” is promising to create 400 jobs, this is a small number when contrasted with the reported 177,000 jobs lost in the retail sector as of December 2020. Furthermore, there is an increasing trend towards “live shopping”, in which influencers or celebrities will showcase clothing and encourage consumers to buy clothes in real-time. TikTok is already planning to implement its expansion into the world of e-commerce through live shopping features.
A trend towards continued working from home may also have implications for the UK economy. According to KPMG, half of UK finance workers want to work from home after COVID-19. This could have devastating impacts on sectors that rely on commuters such as hospitality.
Travelling for business is also a trend to watch in 2021. In 2018, £20.5bn was spent on business travel. Historically, business travel has taken longer to recover after a recession. After the 2008-09 financial crisis, international travel took five years to recover, as opposed to the two for leisure travel. The question remains whether travelling for business will be viewed as a necessity in the coming decade.
The future of the economy is uncertain because COVID-19 is uncertain. While the vaccination rollout appears promising, no one can predict whether this will be just the beginning of a perpetual cycle of fighting new variants.
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[…] In November UK GDP dropped by 2.3 percent, but the relaxation of restrictions allowed for the growth of 1 percent, which is what saved the economy from experiencing a double-dip recession, data from The Office for National Statistics shows. It was a common trend throughout 2020 for the economy to begin to recover but then fall the other way once new restrictions were implemented to combat rising numbers of positive COVID-19 cases. COVID-19 is undoubtedly the main catalyst for the UK’s economic downfall in 2020. […]
[…] this will be an opportunity to analyze sectors which the UK heavily relies on to support its economy and decide if such proportions should accordingly be molded in the future. Furthermore, since the […]