UK Economic Update: COVID-19

Scenario-based analysis of the potential short-term impacts of COVID-19 on UK economic growth

As well as serious implications for people’s health and the NHS, coronavirus (COVID-19) is having a significant impact on businesses and the economy. With such a fast-moving situation, we will be updating our analysis of the UK economic impact regularly to help you with your response and planning. New and updated insights will be available at the end of each month.

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Key points - 22 July

The latest economic data shows that economic activity in May remains weak but there are signs that the decline has slowed. The data for the three months to May showed a continued sharp contraction in GDP of 19.1%. However, in May alone the economy grew by 1.8%, driven by an expansion in the manufacturing and construction sectors.

While this was lower than expected, there are some early signs of recovery. Around 89% of UK businesses were in operation at the end of June, with a further 4.3% planning to start trading in early July, as more non-essential retailers, restaurants and pubs emerge from the lockdown. PMIs also suggest activity levels returning to neutral levels.

Our projections reflect more recent economic data on the impact of the crisis, notably the lower-than-expected improvement in economic activity observed in May when the economy grew by 1.8% compared to April. Our estimates for GDP growth in 2020 now range from -10% to -13%. There should be a gradual recovery later this year and in 2021, although a deeper contraction in Q2 could hold back the speed of the recovery in the UK after the initial bounce from leaving lockdown. We estimate that the level of GDP may still be around 1% to 7% below pre-crisis trends by the end of next year.

The worst-hit sectors in terms of short term economic damage continues to be the food service (e.g. restaurants and pubs), hotels, retail and transport sectors. In our ‘Smooth exit’ scenario, these sectors shrink by 15% to 25% in 2020, relative to a baseline without COVID-19. In our ‘Bumpy exit’ scenario, these sectors could suffer a negative GVA impact of around 25% to 40% in 2020.

Public sector finances are increasingly coming under pressure, due to the significant increase in government spending to support the economy during the crisis, as well as lower tax receipts. For example, VAT receipts were 45% lower than in June 2019, while public sector borrowing in the first quarter of 2020/21 alone is now more than double the amount for the whole of 2019/20.

Our revisions to the cost of the fiscal support package and lower economic growth scenarios imply a sharp rise in the budget deficit to around 17-24% of GDP, but much of tis rise will reverse in 2021/22m with the deficit falling to around 5-9% of GDP.

COVID-19 has had a significant impact on people’s wage and job prospects, with 649,000 fewer people on the payroll at the end of May and 9.4m workers furloughed. While the Coronavirus Job Retention Scheme (CJRS) has provided a much-needed lifeline to many workers, the expected fall in economic growth in 2020 is likely to lead to a corresponding decline in labour demand, raising concerns that many furloughed workers may not have jobs to return to by the end of 2020.

Under our ‘Smooth exit’ scenario, demand for workers is likely to fall by around 5% in the absence of public support. This means that around 17% of furloughed workers may become surplus to business requirements, and are therefore at risk of redundancy. Workers in the hotels and restaurants sector, education, and arts and recreation sectors are likely to be most affected.

This underscores the importance of public measures to support the return of workers, for example through the job retention bonus scheme. In the longer-term, measures to upskill the workforce to meet the new skills needs of a digital economy are needed to create a resilient workforce.