COVID-19 first started to significantly hurt the UK economy in early March 2020, where the UK economy was hit by the crippling news of a lockdown to restrain the spread of the virus. Profit-maximising firms realised that the economy was entering a recession, with risk-averse consumers starting to have less confidence in the economy. Firms across the UK, in a desperate attempt to keep costs down, relieved more and more people of their jobs. This then resulted in plenty of workers who no longer had jobs, resulting in a fall in their incomes, which in turn results in a fall in their standard of living. UK unemployment rates rose from 3.8% in 2019 to 5.4% in 2020, according to the IMF. As less people have incomes, less consumption can occur in the economy. This results in a fall in aggregate demand, resulting in a fall in economic growth. This results in a fall in gross domestic product (GDP) in the economy, with the UK economy having been hit by the worst contraction in 41 years, as the economy shrunk by 2.2% in the first quarter of 2020.
Due to the loss of jobs, less people are levied income tax, as they no longer have incomes to be taxed. Income tax is the biggest source of government tax revenue in the UK, with approximately 25% of UK tax revenue coming from income tax. As a result, there is a significant fall in government revenue. Furthermore, more people are eligible for transfer payments like benefits, resulting in a rise in government expenditure. Both of these together result in a significant worsening of the UK government budget deficit. As a result, this means the government has to increase borrowing to fund current and future capital expenditure. Increased borrowing also means the government is required to pay interest payments on these loans as well in the future, prohibiting future growth in the productive potential of the economy.
Furthermore, the long-term impacts of the pandemic on the economy cannot be understated. Firstly, the UK is likely to become less attractive to prospective investors. On 28 March 2020, Fitch Ratings – one of the “Big Three credit rating agencies”– decided to downgrade their perception of the UK’s government debt rating from ‘AA’ to ‘AA-’, providing the reasons of the excessive borrowing undertaken by the UK government in response to the coronavirus pandemic, economic decline and lingering uncertainty in the economy still after the lack of decisive action concerning Brexit. A fall in the credit rating suggests that the UK government are less likely to pay back their loans and more likely to default on their payments. This implies that lenders are less willing to lend money to the UK in the future, as they have less confidence that they will get their money back. Furthermore, lower credit ratings also signify to potential investors there is a greater risk in investing into the UK economy than there was before the pandemic, meaning they are less inclined to invest in the UK economy. These investors will consider the opportunity cost of investing in the UK is too big a risk for them to take, particularly considering countries like China have actually seen an increase in their GDP since the pandemic began.
Another impact on the UK economy of the pandemic is the aggravation of income inequality in the UK. An important factor to take consideration of is that the labour market allocates wages to individuals depending on factors like their experience, skills, and qualifications. Those who earn the lowest in society do so as they do jobs which are perceived to carry less skill, and so are often seen as ‘dispensable’ by the firms who employ them, as there is a significant number of people who are able to do the job that they are doing. These individuals are in the lowest income bracket, and firms find it the easiest to get rid of these types of workers. This helps to explain the findings in a survey by the Resolution Foundation – an independent British think tank – of 6,000 workers. The survey found that 30% of workers in the lowest income quintile had been affected by the pandemic, in comparison to only 9% of those in the highest earning quintile.
One thing to note is that the impact of the pandemic varied depending on the sector. Sectors which were highly automated prior to the pandemic, or already had the necessary infrastructure in place, (e.g., IT/software engineering) were able to facilitate telecommuting far more easily than sectors where telecommuting was not viable (e.g., entertainment/hospitality). In fact, the largest decline was seen in the accommodation and food sector, where output had fallen by 91% from February to April 2020. Output in the arts and entertainment sector had similarly fallen by 49% from February to May 2020. On the other hand, output in the information and communication industry saw a maximum fall of only 13%, while in the financial services sector it was only a 5% decline. The UK is also the third biggest aviation market in the world, following China and the USA. It hosts large firms like Airbus and Rolls Royce, which have significant UK based operations that provide thousands of jobs for the UK economy. In the UK alone, the aviation industry faced a potential loss of over £20 billion in 2020. Finally, house prices across the economy were initially decreasing, but this was counteracted by the introduction of the Stamp Duty Holiday – a response by the UK government that I cover in more detail in this article (https://www.econthoughts.org/post/the-uk-government-s-response-to-the-covid-19-pandemic).
There was a significant drop in productivity during this period due to the amalgamation of a few factors. Firstly, people who got ill from COVID-19 would take more sick days off work, meaning this would have limited the amount of work businesses were able to conduct. Secondly, the enforced closure of schools from March to July 2020 and January to March 2021 left a lot of extra childcare responsibility on parents and carers. Henceforth, many of these people would not be able to work as much or as productively as they usually could have done. Thirdly, China - the source of the outbreak - is heavily integrated into global supply chains. Due to globalisation, many firms in the UK were dependent on parts of the production line that were happening in China, and when these were disrupted, it resulted in a fall in productivity in the UK as well.
Another impact of the pandemic was the fall in the standard of living of UK residents which occurred as a result. As more and more people started to lose their sources of incomes due to the recession, a lot of people were coerced into a significant fall in their conspicuous consumption. Furthermore, those on the lower end of the income scale saw significant restraints on their autonomous consumption, reducing their standard of living.
In conclusion, impacts of the pandemic on the economy have been severe and far-ranging. The impact has not been distributed equally, whether you look on the income scale, geographical scale or industry scale. The UK’s recovery is vital, with much of the responsibility lying at the feet of the government for what they have done in response to the pandemic.
References:
UK Parliament House of Commons Library
BBC News
Financial Times
International Air Transport Association (IATA)
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