Economic impact of coronavirus: gaps in support and economic analysis Contents

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1The economic context

7.The coronavirus crisis has had an unprecedented impact on the UK economy. The second quarter of 2020, which coincided with the first Covid wave and the first lockdown, saw the economy shrink by a fifth in terms of GDP. Although GDP recovered 16 per cent in the third quarter compared to the end of the second quarter, UK GDP was measured by the Office for National Statistics (ONS) to be 9 per cent below what it was in the same quarter last year.4

8.In its most recent Economic and Fiscal Outlook, published in November 2020, the Office for Budget Responsibility (OBR) stated:

The coronavirus pandemic has delivered the largest peacetime shock to the global economy on record. It has required the imposition of severe restrictions on economic and social life; driven unprecedented falls in national income; fuelled rises in public deficits and debt surpassed only in wartime; and created considerable uncertainty about the future.5

GDP as a measure of the impact of the coronavirus: international comparisons

9.International comparisons appear to indicate that the UK suffered a greater fall in output compared to many other countries during the second quarter of 2020.

Source: Based on chart in OBR, Economic and Fiscal Outlook, November 2020, p 39.

10.The Bank of England has observed that one of the reasons for the more severe impact of the coronavirus on UK GDP is that as a country, it is more dependent on sectors which involve high levels of human interaction than other economies:

In the UK, spending on things that typically involve interactions with other people—such as attending cinemas, restaurants, or live sports events—represents around 13% of total output, compared with around 11% in the US and 10% in the euro area, and this type of spending has been particularly affected by Covid-19.6

11.However, we also received evidence that GDP measurement was particularly challenging in this recession, making international comparisons difficult. Jonathan Athow, Deputy National Statistician at the Office for National Statistics, observed that the UK measured public services output by taking into account the amount of activity in sectors rather than inputs. While this is the recommended approach internationally, it is uncertain as to what extent other countries are following this approach. He told us that: “if you take an input based approach to the public sector, you would not have seen the big falls in activity that we have seen”7 and if you take nominal GDP rather than real GDP,8 “our economic performance looks broadly similar to other countries”.9

12.In a letter to us on 1 February 2021,10 Jonathan Athow explained:

The difference in practices for recording public sector output between countries only affects comparability of the headline volume or ‘real’ estimates of GDP. Current price or ‘nominal’ estimates of GDP are not affected and therefore more internationally comparable, but such comparisons do not always capture all the features of government services provided in the volume estimates. Figure 1 shows that while the UK’s performance on the volume measure is the weakest, the current price measure puts the UK in a much more comparable position.

The second comparison, at figure 2, looks at countries’ performance in terms of volume or ‘real’ GDP, if we remove all Government expenditure from the measure of GDP. While this also removes the effect of different practices for recording public sector output, it obviously means an important part of the economy is ignored. As the chart below shows, while this approach makes little difference to the fall in UK GDP, for other countries it makes the falls in their GDP substantially larger therefore narrowing the gap between the UK and other countries. The ‘volume GDP w/ GGFCE’11 includes Government spending, while the ‘w/o GGFCE’12 series excludes Government spending.13

13.Professor Jagjit Chadha, the Director at National Institute of Economic and Social Research, told us that there were particular difficulties with measuring health activity. The deflator14 that the ONS uses for the health sector is based on normal NHS activity but the NHS had significantly shifted its activity during the first lockdown. If the ONS had deflated health sector output using a GDP deflator rather than one focussed on health, health output would have increased rather than decreased:

The specific example here in the health sector is that what the measurement does is it takes the expenditure on health and social services and deflates that nominal expenditure by a count measure based upon the normal activities of the National Health Service. That is people going to appointments, dental practices and the normal activities that go on when we are not in a pandemic. What has happened this year is that a lot of those activities have reduced, either because the supply has changed—the health service has moved to dealing directly with the Covid crisis—or because people have decided not to take up the level of supply service that they otherwise would have done. Because we are measuring only the amount of normal activity compared to the level of expenditure that has gone up, it looks as though the prices that we are paying have gone up a lot, because we have a large amount of expenditure with a small amount of activity. In fact, what has happened is there has been a huge increase in Covid-related activities in other areas that are not being picked up by the measures that the ONS is projecting. If we looked at that or at the increase in expenditure in health services, and applied not the deflator implied by health but the across-the-board deflator, or some notion of the increase in wages or costs, we are likely to have an increase in health sector activity. Depending on how you do that calculation—there are various methods—what you then get is not a fall in health sector real output but an increase of something in the region of 20% to 50%.15

14.Professor Chadha went on to say that changing the health deflator would mean that “what you then get is a fall in GDP substantially smaller—something in the region of 3% to 5% smaller—than we are currently estimating”.16 Karen Ward, Managing Director and Chief Market Strategist for EMEA at JP Morgan Asset Management, also told us that if health activity was removed from GDP, the gap between economic performance in Germany and economic performance in the UK would narrow significantly.17

15.Jonathan Athow pointed out that if measurement issues were causing the UK to appear to have a poorer economic performance compared to other countries than normal in the recession, you would “expect a stronger rebound” once the economies started to recover, and “the sort of long-term impact is not going to be a particular issue”.18

16.Though the structure of the UK economy makes it potentially more vulnerable to the present shock, the Committee notes that comparisons with other countries’ GDP may also be affected by differing measurement methodologies. We therefore caution against over-reliance on the UK’s GDP performance in comparison to other countries, as a measure of the impact of coronavirus on the economy.

17.We recommend that the Treasury and the Office for Budget Responsibility provide a commentary at the time of the Budget on GDP measurement issues and the implications that these measurement issues have for comparisons between the UK and other countries.

Forecasts of future impact on the economy

18.In its November 2020 Economic and Fiscal Outlook, the OBR estimated “a 7 per cent fall in output” in its central scenario for November, arising from the second wave of the virus which occurred in early autumn and the lockdown which ensued. This would take the level of GDP back to 15 per cent below the pre-virus peak in January.19

19.The OBR presented three scenarios for the future path of the economy in its Economic and Fiscal Outlook in November 2020:

• an upside scenario, in which lockdown succeeds in bringing the second wave under control and the rapid rollout of effective vaccines enables output to return to its pre-virus level late in 2021;
• a central scenario, in which restrictive public health measures need to be kept in place until the spring and vaccines are rolled out more slowly, leading to a slower return to pre-virus levels of activity at the end of 2022; and
• a downside scenario, in which lockdown has to be extended, vaccines prove ineffective in keeping the virus in check, and a more substantial and lasting economic adjustment is required with economic activity only recovering to its pre-virus level at the end of 2024.20

20.The table below sets out the scenarios:

21. England is currently in the midst of a third national lockdown and other nations of the UK are also in the midst of severe social restrictions.21 The death rate from coronavirus remains high, with the NHS under intense pressure.22 By autumn 2021, the Government expects that the rest of the adult population will have received one of the approved vaccines.23

22.The economic impact of the third lockdown is as yet unknown. The Chancellor told the House on 11 January 2021:

The Office for Budget Responsibility’s November forecast showed GDP falling again in the final quarter of last year and it forecast the largest fall in annual output for over 300 years. Even with the significant economic support we have provided, more than 800,000 people have lost their jobs since February. While the new national restrictions are necessary to control the spread of the virus, they will have a further significant economic impact. We should expect the economy to get worse before it gets better.24

23.The prolongation of the economic crisis will have severe implications for employment and welfare, particularly on certain groups in the population such as low-income groups, young people, women, black and minority ethnic groups and renters who we identified in our second report in the inquiry as having been already hit hard by the sharp fall in output which occurred during the first wave and the first lock-down.25

24.As noted in our second report of the inquiry, social interaction and consumption can spread the virus, but the virus in turn also has an economic impact: if prevalence of the virus increases, that will reduce certain types of consumer spending, as people fearful of the virus do not follow their normal consumption patterns; and that in turn impacts on business confidence:

the path of the economy does not only depend on the course of the virus and Government restrictions or lockdowns, but on how the population views the risk from the virus and their job security, and how that in turn impacts on consumer and business confidence. Combatting the virus is an economic as well as a health priority.26

25.Ian Mulheirn, Executive Director, Tony Blair Institute for Global Change, told us that it was as yet unclear as to how the vaccine roll-out would affect the path of the economy. He cautioned against “assuming that once the mortality rates had fallen, the economy would just get back to normal”, as he believed that lots of people would still be afraid of “engaging in social consumption […] if prevalence is not kept under control”.27

26.The remainder of this report draws from the economic context set out in this section. Chapter 2 sets out ways in which those who have missed out on Government support packages might receive further help. Chapter 3 looks at how economic analysis and modelling can help to guide and inform future Government decision-making on imposing and lifting lockdown restrictions.