UK GDP only slowly recovered after the last recession, but the COVID-19 induced recession of 2020 is totally different in nature and impact being far deeper with a much faster, but already slowing, recovery. The October 2020 GDP was 23.4% higher than the April 2020 level when the full lockdown was in place. However, GDP remained 7.9% lower than that recorded in February 2020 before the impact of the pandemic started to be felt.

Public sector net borrowing in the first seven months of this financial year (April to October 2020) is estimated to have been £214.9 billion. This was £169.1 billion more than in the same period of the previous year and the highest public sector borrowing in an April to October period since records began in 1993. The substantial increase largely reflects the impact of the pandemic on the public finances, with the furlough schemes (CJRS and SEISS) alone adding £54.4 billion to borrowing in the financial year-to-October 2020.

The Monetary Policy Committee within the Bank of England sets interest rates to influence spending with a view to ensuring inflation sustainably returns to 2%. This is the level deemed appropriate to support jobs and growth. The MPC reports that in the last decade the economy has required low interest rates. It reduced the base rate on 11 March 2020 to 0.25% and just one week later, reduced them to 0.1% to help control the economic shock of COVID-19.

As a converse trend to that of employment, the unemployment rates had generally been falling for both men and women since late 2013 but is now increasing as a result of COVID-19. For July to September an estimated 1.62 million people were unemployed, representing an increase of 318,000 in the year and up 243,000 on the quarter. The annual increase was the largest since the December 2009 to February 2010 period and the quarterly increase was the largest since the March to May 2009 three month period.

CPI inflation rate increased to 0.7% in October 2020 from 0.5% in September, which was above forecasts of 0.6%. It was the highest reading in three months, amid a rebound in prices of clothing (no change compared with a fall of 1.5% in September); food (and increase of 0.6% compared with a fall of 0.1%); and furniture, furnishings and carpets (a rise of 0.1% compared with a fall of 0.5%). Prices increased faster for transport (1.2% compared with 0.9%); and miscellaneous goods and services (0.8% compared with 0.7%) while the cost of recreation and culture eased (growth of 2% down from 2.4%) and housing and utilities declined (1.3% compared with 0.9%).

The rate of total and regular pay growth had stood at 2.9% in the December 2019-February 2020 period, immediately prior to the major impact from COVID-19. It then slowed sharply and reflected a reduction of 1.2% between April and June 2020 for total pay and fell by 0.1% for regular pay. In Q3 2020 the rate of annual pay growth was 1.3% for total pay and 1.9% for regular pay, with the difference between the two measures reflecting subdued bonuses. The level of those bonuses fell by 10.7%.

The latest data concerning business investment relates to Q2 2020, at the onset of the measures to control the spread of COVID-19. It shows that in that quarter, business investment fell by a highly significant 26.5%. This is by far the largest quarterly fall in investment on record. By way of comparison business investment fell at most by 9.6% during the 2008 global economic downturn.

The ICAEW’s Business Confidence Monitor ^TM (BCM) index demonstrated a significant negative score at the depth of the 2008 recession but showed a strong recovery in 2009. Optimism reached its strongest point in 2014, and has since been trending down, widely associated with issues concerning Brexit in recent years. Greater optimism was evident in the first quarter of 2020 as hopes of a new government reaching a deal with the EU surfaced. Eventually in late December 2020 a trade deal was agreed with the EU to widespread relief of the many sectors of the economy. Naturally the conditions of 2020 and the impact of the COVID-19 pandemic have caused a rapidly declining level of optimism. The commencement of various vaccine roll-outs offers some cause for optimism, but clearly the scale of the roll-out and the January 2021 announced further national lockdown will impact business confidence in the first half of 2021.

It is little surprise that under the most extreme changes in the economy the number of new start-ups has fallen in 2020. In the first three quarters there were 304,400 business start-ups (itself a high number given the circumstances) but this was 4.6% down on the level in the corresponding period of 2019. The level of reduction appears modest with the GDP developments during this period.

There has also been an increased in the number of business deaths in the first three quarters of 2020. The ONS identifies 290,255 such incidences in 2020 representing an increase of 7.4% compares with the same period of 2019. It is highly probable that as government initiatives to protect companies and employment during the pandemic are phased out in 2021, then the number of business closures will further increase, and so the figure may be artificially low for 2020.

The strong role of business confidence in determining new construction demand is a primary reason why the sector has a reputation for being volatile, and when the economy is in growth the market development in construction tends to exaggerate that of the wider economy. Equally when the economy is shrinking then new construction demand tends to falter at a faster rate than the wider economy.

The construction market has reacted relatively predictably. The recovery in Q3 in the new construction sector has lagged that of the wider economy, and predictably exaggerated the overall growth/decline during the year having fallen sharply in Q2. The R&M sector has reacted in a virtually identical way to new construction activity, reflecting the high elements of improvement activity. That improvement activity itself was a reaction to the low levels of new construction as a consequence of business investment decisions being delayed with the uncertainty surrounding a trade deal with the EU that continued into December 2020.

Significant changes in new infrastructure output have been seen in the last few years. The electricity sector has been boosted by wind power energy programmes, while the railways sector has been boosted by some major rail infrastructure projects during the review period, most notably Crossrail and now HS2. Many of these major changes are a reflection of government policy but activity has been curtailed in 2020 by COVID-19, though the overall impact is expected to be short term with the government likely to use infrastructure spending to boost the wider economy following both COVID-19 and the lack of a trade deal with the EU.

While the UK officially left the EU on 31 December 2019, there was an interim trade agreement running to 31 December 2020, during which no change was implemented in trading agreements. The elongated negotiations to establish a trade deal with the EU continued right into the last few days of the year. However, the announcement of a deal concerning tariffs and quotas will come as a major relief to businesses in manufacturing, agriculture and export/import.

The importance of that trade deal can be quantified: An August 2020 report by the London School of Economics identified that the cost of no deal being secured with the EU places the economic hit over the long-term at 8% of GDP, which is similar to the government’s own forecast of 7.6%. The Organisation for Economic Co-operation and Development identified in November 2020 that a no-deal Brexit would deliver a “serious” short-term hit to the UK economy and produce a “strongly negative” effect on trade, productivity and jobs in the long-term. The international think tank downgraded its outlook for the UK economy expecting an 11.2% fall in GDP in 2020 followed by a slower-than-expected recovery with growth restricted to 4.2% in 2021 and 4.1% in 2022. By way of comparison the Office for Budget Responsibility (OBR) has projected a 2% reduction in GDP in 2021 under the no deal scenario. This prospect has now been averted.

The COVID-19 pandemic has caused turmoil internationally, but the specific structure of the UK economy (with a strong reliance on the service sectors) has resulted in a severe recession, as was widely expected at the start of the year.

The Office for Budget Responsibility’s central scenario included in its November 2020 Fiscal Sustainability Report assumes restrictive public health measures need to be kept in place until the spring and vaccines are rolled out slowly, leading to a slow return to pre-virus levels of activity at the end of 2022. This scenario assumes some permanent scarring to the economy from the pandemic of 3%. It identifies an 11.3% fall in GDP in 2020 with a 5.5% recovery in 2021 and a stronger 6.6% in 2022, falling to growth of 2.3% in 2023 and 1.7% in 2024. This expectation was developed prior to the major upturn in COVID-19 cases in December 2020 and January 2021, which subsequently caused the government to initiate a further national lockdown in January 2021.