One year on from the first lockdown: What lies ahead?

There have been few occasions for optimism in the year since the UK has had to confront the Covid-19 pandemic.  This time last year we had just entered the first national lockdown, after a delay which NIESR estimates might have doubled the number of lives lost.

With shortages of some goods reported in the shops, while non-essential workers were told to stay home, attention turned to the economic consequences of the lockdown measures.  NIESR’s sectoral model of the UK economy (DSM) was pressed into action early on to estimate the ‘spillover’ effects of restrictions in some sectors on others. We found that restrictions in industries such as construction, manufacturing, wholesale and retail had important and negative spillovers for more downstream industries, and this might help us think about which industries policy may wish to foster.

For economists and social scientists, the pandemic provided an early boon: a plethora of new, high-frequency data sources published by the Office for National Statistics and others.  At the same time, questions arose over some important datasets when stressed by the pandemic and lockdown shocks.  Are the employment figures overstating the numbers of UK nationals in work? Do our measures of public sector activity differ so wildly from other countries that comparisons are impossible?  NIESR research for the House of Commons Treasury Committee in December suggested that it could be worth several percentage points of GDP. And with lockdown limiting the availability of many normal consumption goods, we have published a monthly ‘Consumer Price Index Lockdown Weights’ to indicate how the cost of living may have changed under circumstances of a sharply divergent purchasing basket.  We have also been able to assess using an epidemiological model what kinds of policies may have better dealt with this crisis and found in favour of multiple local rolling interventions combined with efficient trace, track and tracing mechanisms.

As official data on activity and employment began to be available the enormity but also the unevenness of the economic shock became apparent. Large wage falls were reported, particularly in sectors of the economy with a large proportion of workers furloughed. The furlough scheme succeeded in keeping unemployment well below where it would otherwise have risen to and we called for its extension when the Government insisted it would end in October, a decision later sensibly reversed.  We are waiting to understand how the furlough scheme will evolve to allow transitions to employment in new sectors for those who lose their jobs once it ends. We believe that unemployment may ultimately rise to 7.5 per cent next year.

Across the labour market the picture varied dramatically, with young people in low-paid jobs within low-productivity service sectors, such as hospitality and retail, at the forefront. Our research has consistently found uneven economic impacts, including at the regional level, and with levels of destitution three times higher than would have been the case otherwise, with particularly worrying impacts on young people and the elderly.

And at the same time as households across the UK have been pushed into destitution by the pandemic, indicating the impact on poorer households in general, the end of the Brexit transition period has introduced new barriers to economic activity. Trade, migration and productivity are all expected to be lower as a result, but disentangling short-term Covid-19 effects from the short-term Brexit teething problems and the permanent Brexit dislocations will take time and care.

If optimism has been in short supply over the past year, it seems now to be returning in some quarters. The vaccine roll-out, which builds on existing health networks, has been a success, fiscal policy support has been appropriately supportive, and wealthier households have windfall savings that they may choose to spend.  This has given rise to expectations in policy circles of higher growth and inflation through the rest of this year. The Bank of England now expects growth of 5 per cent in 2021, while the Office for Budget Responsibility forecast 4 per cent.  We have been more cautious as the vaccine programme is far from complete here and, as an open economy, its relative failure overseas is significant.

Our February UK Economic Outlook included our forecast for output to be 6 per cent lower by 2025 compared with our pre-Covid forecast, which included a softer Brexit than has transpired. There remains enormous uncertainty about the interaction of lifting restrictions and the effects of the vaccine on the path of Covid-19 and how consumers and businesses will adjust, as well as over the degree of enduring change – sectoral shifts, relocation – from Brexit and Covid which may only become clear after a return to ‘normal’. The cloud of uncertainty has not been lifted. Business investment which was delayed or cancelled will leave productivity lower and it is hard to imagine that the twin 2020-21 shocks of Covid-19 and Brexit will leave the British economy unscathed in the long run, without a more imaginative set of policy responses.

Thanks to the new high-frequency data, we can track economic activity more quickly even than we could a year ago, and it looks like the economy may even by coping better with the successive lockdowns.  Our latest nowcast suggests GDP may fall by a smaller-than-forecast 2.4 per cent in the first quarter of this year: further good news could see upward revisions for the rest of the year when our next forecast is published on 10th May. But a lot will have changed for a lot of people when the pandemic is firmly behind us, and it may be next year or later before the nature of some of those changes become clear. What is already clear is that many have lost their lives and many more their livelihoods. The time for a plan for National Recovery is now.