Analysis: the country suffered its worst recession in a century and inflation made an unwelcome return.
Rishi Sunak will give his spring statement on Wednesday on the second anniversary of the initial Covid lockdown, with the economy still reeling from the effects of the pandemic and facing fresh headwinds from war in Ukraine.
In the two years since the government first ordered people to stay indoors to guard against soaring infections, the country has been through huge economic changes. Initial turmoil and uncertainty eventually gave way to a gradual recovery, but now UK households face a worsening cost of living crisis amid high inflation and a surge in energy prices made worse by Vladimir Putin’s invasion.
GDP
Britain’s economy suffered the worst recession in 100 years as the initial wave of Covid-19 and late entry into a tight lockdown caused a sudden stop in activity across the country. UK GDP plunged by almost 20% in the second quarter of 2020, and by 9.4% for the year as a whole – the worst performance in the G7.
The economy has since grown at the fastest rate in the group of wealthy nations, partly because of the snapback from a bigger fall, and returned to pre-Covid levels in December. However, other G7 nations are further above their pre-pandemic levels, including the US and France.
Inflation
Inflation has risen to the highest rate since 1992 in the fallout from Covid-19, with Russia’s invasion of Ukraine threatening to add to the problem. Disruption to global supply chains, shortages of workers and materials, and a boom in demand after lockdown have led to the cost of living soaring around the world. In the UK, trade disruption has been added to by Brexit.
Inflation had sunk close to zero early in the pandemic as businesses struggled with evaporating demand. However, stimulus from central banks and governments helped soften the blow and maintain spending power.
With war in Ukraine now fuelling a sharp rise in global energy prices, the Bank of England expects inflation could reach 8% this spring. It has forecast that the rate could peak close to 10% this year.
Public finances
The UK government budget deficit – the gap between spending and income – surged to a peacetime record of about £318bn in 2020-21, as tax receipts collapsed and the state pumped billions of pounds into emergency pandemic support such as furlough, business grants and loans.
The national debt – the sum of every budget deficit – has risen to about £2.3tn, or about 95% of GDP, the highest level since the early 1960s.
Borrowing has fallen sharply in 2021-22 as the economy recovers, to about £150bn, although is expected to remain higher than pre-Covid levels in each year until at least the middle of the decade.
Transport
Public transport use has been slow to recover from the pandemic amid a rise in working from home. The number of car journeys is close to pre-Covid levels, although the number of trips on buses remains at 80% and usage is lower in London.
A minority of Britons worked from home during the pandemic, with rates reaching a peak of about 48% in February 2021 – with more people in the capital working from home because of a higher proportion of office-based jobs than in smaller cities and towns. Figures show the London underground is quieter on Mondays than later in the week, as office staff embrace flexible working in a trend that could persist after the pandemic.
Retail sales
Lockdown fuelled a boom in internet shopping as consumers stayed away from the high street. While online sales have fallen back as physical shops reopened, experts expect a permanent shift to higher rates of internet sales after the pandemic.
Online spending rose from about 19% of total retail sales in February 2020 to a peak of 37.8% during the January 2021 lockdown, before cooling back to about 27% in January 2022.
The shift has prompted a wave of shop closures, changing the landscape of Britain’s high streets. Online firms have recorded bumper profits – enriching their billionaire owners – while fuelling rapid growth in warehouse and delivery jobs.
