What Was the Covid-19 Economic Shock?

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Where this sits

On 23 March 2020 the Prime Minister spoke to the nation

On the evening of Monday 23 March 2020 the Prime Minister, Boris Johnson, told people across the UK that they must stay at home. They could go out for only four reasons: to buy basic necessities; to exercise once a day; for medical needs or to care for someone; and to travel to work that could not be done from home. Shops selling non-essential goods were to close. Three days earlier the Chancellor of the Exchequer, the finance minister, Rishi Sunak, had said the government would help pay people's wages.

Much of the economy closed in the second half of March 2020

Covid-19 is the disease caused by a new coronavirus that spread around the world in early 2020. In the week before the stay-at-home order, schools closed. On 20 March the Chancellor said restaurants and bars were closing. From the evening of the stay-at-home order, people could leave home only for the reasons the Prime Minister had listed. Gatherings of more than two people were stopped. The police would be given powers to enforce the rules.

Together, the closures and the stay-at-home rules were called the first lockdown. A lockdown is a set of legal limits on leaving home and on which businesses can open.

Almost every part of the economy produced less in April 2020

Gross domestic product (GDP) is the value of the goods and services a country produces, also called its output. GDP is estimated every month as an index. An index is a single number that rises and falls with output. On the most recent figures from the Office for National Statistics (ONS), the index was 97.3 in February 2020 and 72.7 in April 2020.

The ONS first published the April figure in June 2020. It called this the biggest one-month fall since its monthly figures began in 1997. Almost every part of the economy shrank. Pubs, education, health and car sales did most to pull the total down. In that first estimate, construction output fell by 40.1 per cent in April alone. Some output came back over the summer, as restrictions were partly lifted. But the index stayed below its February level for the rest of 2020.

Restrictions returned in November 2020 and January 2021

In the autumn of 2020 England used a system of local rules in tiers, or levels. Each area's tier set its rules on meeting people and on which places could open. From 5 November to 2 December 2020, people in England were told to stay at home again. This was the second lockdown. A third lockdown became law in England on 6 January 2021, because cases of the virus were rising. In January the Prime Minister said the governments of Scotland, Wales and Northern Ireland were taking similar steps. Monthly output dipped in November 2020 and again in January 2021, when the restrictions returned.

The ONS also measures GDP for a whole year. It removes the effect of price rises, so that higher prices do not look like extra output. On its latest figures, UK GDP was about £2,673 billion in 2019 and about £2,405 billion in 2020.

On 20 March 2020 the Chancellor announced help with wages

The Chancellor's plan was called the Coronavirus Job Retention Scheme. Under it, an employer could keep staff on its payroll, the list of people it pays, even with no work for them to do. The employer could then claim a grant from HM Revenue and Customs (HMRC), the tax authority. Staff kept on in this way were said to be furloughed. The grant paid 80 per cent of each furloughed worker's salary. It paid at most £2,500 a month for each worker. The grant counted from 1 March, so it also covered pay from before the announcement. The Chancellor said the aim was that firms would furlough staff instead of laying them off, which means ending their jobs. The grant meant staff could keep their jobs even if their employer could not pay them.

Firms and the self-employed were helped too

The Chancellor also let firms delay paying VAT, a tax on sales that firms collect for the government. He offered them loans as well. A scheme for the self-employed followed on 26 March. The Office for Budget Responsibility (OBR) is the official body that forecasts the government's finances. In July 2021 it added up the help given so far. By then, grants had supported the incomes of 2.6 million self-employed people. The government had also guaranteed loans to more than one and a half million businesses. A guarantee means the government promised to repay the lender if a business could not.

Jobs on furlough peaked in May 2020, and the scheme ran until September 2021

HMRC's final figures show 8.9 million jobs on furlough on 8 May 2020. The number fell to 2.4 million by the end of October 2020. The Prime Minister then extended the scheme when he announced the second lockdown, which began in November. The number on furlough rose to 5.1 million in January 2021. The scheme closed on 30 September 2021. About 1.2 million jobs were still on furlough on that day.

Over the whole life of the scheme, HMRC counts 11.7 million jobs supported, at 1.3 million employers. More of these jobs were in wholesale and retail than in any other sector. Wholesale means selling goods to other businesses, and retail means selling to the public.

Output fell by a quarter while furlough kept people in their jobs

Between February and April 2020, monthly output fell by about a quarter. Over the same months, the furlough scheme kept millions of people in their jobs. The scheme carried on through two more lockdowns. The next module asks three questions. Why did the UK's output fall so far? Why did unemployment rise so little while output fell so much? What did the support cost, and what lasting effects did it have?

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