The effect Covid-19 is having on the UK economy

24th April 2020

The impact of this Coronavirus pandemic on populations is evident and has seen many having to adapt their social and working norms. At the time of writing, in the UK it is suggested that more than 9 million workers, almost a third of the nations employed, are expected to be furloughed with others unable to work or with reduced working hours imposed. These consequences not only reduce the national economy but inflict financial burdens on the nation’s workforce, often leading to financial distress.


While many large businesses are more financially stable, smaller firms are evidently struggling with the impacts of COVID-19. People’s behaviours have changed, with activities such as grocery shopping, TV entertainments, business meetings, and education all moving online, possibly instigating permanent change.1 The future of the economy at this point is incredibly difficult to predict due to the fluid and unprecedented nature of the situation. The Bank of England interest-rate setter Jan Vlieghe has said “we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century,” and that recovery is unlikely to be swift. 2


Evidence from past pandemics suggests that the economic impact of COVID-19 is much less from people falling ill than from the public health restrictions and social distancing measures put in place.3 Measures to deal with this Coronavirus will substantially increase public sector net borrowing and debt in the short term due to the economic disruption. The support to individuals and businesses through the initial shock phase of this pandemic, let alone supporting the NHS, is colossal but it is hoped this will even out after the pandemic is over and the economy bounces back.4


However, this is an assumed scenario as there are no models to suggest what will happen as the crisis unfolds and businesses are not able to recover. Pressure is mounting on the government to give businesses hope after a warning that social distancing could last the rest of the year. 5 The high initial cost to the government is hoped to have been compensated by what would have been a worse scenario had they done nothing. The reduction in the demand for goods and services and the ability for businesses to provide them, due to the effects of social distancing, will inevitably lead to lower incomes and a cycle of reduced spending, in turn leading to reduced tax revenues combined with increased public spending on social welfare. Public sector borrowing is therefore set to increase by £218 billion compared to the same time last year, around 14% of GDP. 6


This coronavirus outbreak has highlighted that the key workers critical for an effective response and recovery are actually the most likely to be in low paid jobs, with poor working conditions. In the wake of an outpouring of positive public opinion towards the country’s key workers in response to the national crisis, the media and opposition politicians have demanded that certain sectors of key workers working conditions and pay be changed to reflect their responsibility. Sir Keir Starmer, leader of the labour party, has called for a ‘reckoning’ with keyworkers often being ‘overlooked and underpaid and there has to be a change’. The food and social care sectors stand out as the lowest-paid workers of the ‘essential workers’ and are receiving on average 9% less than for similar non-key roles. 7


The Office for National Statistics has surveyed businesses and found that the accommodation and food services sectors have been the hardest hit financially so far, with 87% of this sector, responding to their survey, reporting a substantially lower than normal turnover, along with the arts, entertainment and recreation sector. 80% of business surveyed have shown some interest in the Coronavirus job retention scheme with 24% of businesses either temporarily closing or pausing trading.8 According to new research, coastal and ex-industrial towns are most economically at risk from this Coronavirus pandemic, due to their lack of business diversity. The worst affected towns are those with the most amount of businesses closed down due to social distancing rules and labelled as non-essential. These are: non-food or pharmacy, the accommodation industry, the arts and sports sector, hospitality, travel and tourism, public transport, childcare and the “self-care” industry, which includes hairdressers and laundrettes.9


New research has highlighted how the lockdown measures could increase social employment inequality in Britain with the self-employed the hardest hit.10 They are most likely to work in at-risk sectors where jobs are not possible due to social distancing or not considered ‘essential’, such as mentioned above. Those with a degree are less likely to be affected as they are generally highly skilled workers that are able to transfer their work to being home-based, highlighting the protection working from home jobs can give. However, recruitment is on hold for students entering the job market due to the current employment situation and recessionary climate, with students being told to stay in education until next year when the situation is hoped to have improved.11 While London and Scotland have been particularly hard hit for paid unemployment, the self-employed sector seems to have been hit hardest in the North-East of England. The government was quick to announce the furlough scheme for paid employees but the equivalent government scheme for the self-employed is taking longer to operationalise, with perhaps one-tenth of them not eligible for help from the government due to a lack of self-assessed tax return information.12


World leaders are urging the public not to be complacent with the lockdown as economists fear a second wave of could be worse for the economy than the first.13 The Northern Ireland Secretary Brandon Lewis has publicly said “one of the most damaging things for our economy would be if we came out of lockdown too early” as this would risk a second peak. While industries have said that social distancing measure in place until next year would be catastrophic for businesses, the government must weigh up health and economic concerns.14


Whilst the effect of COVID-19 on the UK economy is severe due to the restrictions imposed to prevent contamination amongst the populace, as it is for most other regions across the world, a loosening of restrictions to ease the financial burden is unlikely to be put in place unless the infection rate is proven to have peaked, and in decline, for fear of a worse and more damaging second peak. However, some countries are already allowing non-key businesses to re-open and non-essential workers to return to work to ease the economic burden. In an unfamiliar environment, only time will tell as to whether the right decisions have been made to combat COVID-19 and to lessen economic decline.