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The Covid-19 Economic Shock

Why the Covid-19 Economic Shock Was So Deep

Explain why UK output fell so far in 2020, why unemployment rose so little, and what the response cost.

Before you start

What you'll be able to answer

  1. Why did UK output fall so far in 2020, and further than in most rich economies?
  2. Why did unemployment rise so much less than output fell?
  3. What did the response cost, and what did it leave behind?

Where this sits

The Covid-19 Economic Shock ยท this module is lit

  1. 20 Mar 2020The Chancellor of the Exchequer, the finance minister, Rishi Sunak, announces the Coronavirus Job Retention Scheme, known as the furlough scheme: employers could keep staff on with no work and claim help with their pay
  2. 23 Mar 2020The Prime Minister, Boris Johnson, tells people across the UK that they must stay at home
  3. 8 May 2020The number of jobs supported by the furlough scheme reaches its peak
  4. 5 Nov 2020A second lockdown, with legal limits on leaving home, begins in England, due to last until 2 December
  5. 25 Nov 2020The Office for Budget Responsibility (OBR), the official forecaster of the economy and the public finances, publishes a forecast for unemployment that assumes support is withdrawn in the spring of 2021
  6. 6 Jan 2021A third lockdown becomes law in England
  7. 3 Mar 2021The OBR publishes its estimate of the total cost of the government's virus-related support
  8. 30 Sep 2021The furlough scheme closes

In February 2021 the ONS compared the UK's fall with the rest of the G7

In 2020 the UK's output, its gross domestic product (GDP), was about 10 per cent lower than in 2019, on the figures of the Office for National Statistics (ONS). In February 2021 the ONS compared the fall across the G7, a group of seven large rich economies. Over the first nine months of 2020, it found, the UK's fall had been the largest of the seven. Why had Britain's output fallen so far, and what did the response cost?

Predict first

In spring 2020, what do you think did more to cut spending on things like restaurants and travel?

Spending on face-to-face services fell furthest

The fall reflected the virus itself, public health restrictions and voluntary social distancing, people choosing to keep away from others, the ONS says. The last two are hard to separate, it adds, because people would have cut back on some things even without closures.

Unlike in earlier downturns, the ONS notes, the fall in spending came mostly from services, above all those that depend on face-to-face contact, such as restaurants, hotels, sport and culture. Households saved more: the ONS notes a record rise in the share of their income that they saved.

The OBR gave three likely reasons the UK fell further

In July 2021 the Office for Budget Responsibility (OBR), the official forecaster, said the UK's deeper fall was likely to reflect three things. The UK had among the highest rates of infection, hospital admission and death in 2020. It spent more time under stricter restrictions, second only to Italy among major advanced economies. And social consumption, spending on eating out, travel and culture, was a larger share of its output than in any other major advanced economy except Spain. Restrictions and distancing may have hit the UK harder, the ONS said.

The ONS added that measurement may play a part. The UK counts the output of schools and hospitals by what they deliver, such as pupils taught and treatments given, not by what they cost. In 2020 spending on both rose, but teaching in school and many hospital treatments fell.