The Bank of England has projected in its latest Monetary Policy Summary that gross domestic product (GDP) will contract by around 4% in the first quarter of 2021, mainly as a result of the latest national lockdown.
GDP Fall
Whilst the Bank of England forecasts that GDP will fall by around 4% in the first quarter of 2021, such a contraction would be considerably smaller than the GDP fall which occurred as a result of the first national lockdown. The Bank of England attributes this much smaller reduction this time around to the fact that: " Firms and households [have] continued to adapt to Covid-related restrictions, with more businesses remaining operational than in summer 2020."
Strong Bounce Back By Economy Forecast
Andrew Bailey, the Governor of the Bank of England, has also acknowledged nevertheless that the Covid-19 pandemic has sped up and contributed to a number of structural changes to the economy which are likely to be permanent, such has the move towards shopping online and working more from home. However, it is his belief that the impact of these changes on the UK economy will not as great as the shift from manufacturing to services that occurred during the 1980's and 1990's. He states that "it won’t be as fundamental as that."
Furthermore, the Governor believes that the success of the vaccination rollout, combined with the fact that around £125 billion in additional savings have been accumulated by the UK population since the start of the pandemic, will mean that the UK economy will quickly bounce back once the lockdown restrictions have been lifted. He believes that the lifting of the restrictions will unleash a considerable increase in consumer spending as "after you lock people up for this long they [are likely] go for it."
Latest GDP Figures
In the latest GDP figures, the Office for National Statistics (ONS) report that GDP fell by 2.6% in November 2020 as a result of the second national lockdown. That means that as at the end of November 2020, the economy was 8.5% below where it was in February 2020 in GDP terms prior to the first national lockdown. Nevertheless, compared with some of the forecasts earlier in the pandemic, that is lower than what was originally feared. Moreover, as at the end of October 2020, just prior to the second national lockdown, GDP had actually recovered to the point where it was just 6.1% below its pre-pandemic level.
The services sector contracted by 3.4% in November 2020, and is now 9.9% smaller compared with prior to the pandemic. Meanwhile, production fell by lost 0.1% in November 2020, and has contracted by 4.7% since February 2020. In contrast, the construction sector expanded by 1.9% in November 2020, and has actually grown by 0.6% since the outbreak of the pandemic. Accordingly, it is the services sector of the economy that has borne the brunt of the economic devastation caused by the Covid-19 pandemic. Accommodation and food service activities suffered the largest fall in November 2020 within the services sector
Unemployment
According to the ONS, unemployment rose by 0.6% in the 3 months to the end of November 2020, to 5% of the working population. That represents a year on year increase of 1.2%. Meanwhile, The number of people seeking unemployment related benefits (known as the 'claimant count') increased by 0.3% to 2.6 million.
The chief UK economist at Pantheon, Samuel Tombs, stated in response to the latest unemployment figures that as the furlough scheme is due to end at the end of April 2021, and as "additional measures to support employment that will be announced in the Budget on 3 March probably will not be anywhere near as generous for firms....., it remains likely, therefore, that the unemployment rate will jump in Q2, probably to about 6 per cent, when many firms – especially in the retail and consumer services sectors – likely will not ask all of their furloughed staff to return to work, and some people who left the workforce at the start of the pandemic return when the economy has reopened."
The general secretary of the TUC, Frances O’Grady, added: "The more people we keep in work, the faster we can recover. But with the job retention scheme set to end in April, millions of people’s jobs hang in the balance. When the government planned to withdraw support last autumn, despite restrictions still being in place, unemployment surged. We can’t let that happen again. It’s time to end the uncertainty and anxiety. The Chancellor must urgently extend furlough support to the end of the year to keep jobs safe."
ETA: Update / Postscript
Since this article was first compiled, new figures have been released by the ONS which found that GDP contracted by 9.9% overall in 2020, which represents the largest fall since the "great frost" of 1709, when the economy contracted by 13%.
GDP increased by 1% in the fourth quarter of 2020, which followed a 16.1% increase in the third quarter. Hence, the UK economy avoided a double dip recession.
The Chief Economist at the Bank of England, Andy Haldane, states that the Bank remains confident that there will be a strong recovery, and that the economy will return to its pre-pandemic size by 2022. He says: "The rapid rollout of the vaccination programme across the UK means a decisive corner has been turned in the battle against Covid. A decisive corner is about to be turned for the economy too, with enormous amounts of pent-up financial energy waiting to be released, like a coiled spring."
Mr Haldane adds that: "Two reasons lead me to expect the turn in sentiment, spending and the economy to be rapid...First, household psychology. Having been bottled in for a year, most people are desperate to get their lives, including their social lives, back. Second, unlike past recessions, many UK households have strengthened their finances significantly due to forced restrictions on their spending....If recent saving trends continue, it might well be over £250billion...by the end of June. As this nest-egg hatches, no one knows for sure how much of this cash will be spent. The Bank of England...[estimate] around 5 per cent, [but] I think there is the potential for much more."
