The Economy Summary is part of our Weekly COVID-19 Bulletin, sent every Thursday. You can sign up to receive your copy here.
UK gross domestic product (GDP) is estimated to have increased by 1.3% in Quarter 4 (Oct to Dec) 2020, revised from the first estimate of 1.0%. The level of GDP in the UK is now 7.3% below its Quarter 4 2019 level, revised from the previous estimate of 7.8%.
There have also been some revisions to earlier quarters in 2020. GDP in Quarter 2 (Apr to June) 2020 is now estimated to have fallen by 19.5%, while it is estimated to have increased by 16.9% in the third quarter. However, the annual picture is largely the same. Over the year as a whole, GDP contracted by 9.8% in 2020, slightly revised from the first estimate of a 9.9% decline.
This is the largest annual fall in UK GDP on record, while historical figures from the Bank of England point to this being the largest annual contraction since ‘The Great Frost’ of 1709.
Separately, the UK economy was the worst performer among the G7 group of wealthy nations last year, in part reflecting that the public health restrictions imposed have been in place for longer, as well as having higher levels of stringency.
The latest monthly GDP estimates for January 2021 show that there was a 2.9% contraction in the UK economy, as the third national lockdown weighed further on GDP. The latest Business Insights and Conditions Survey showed that 42% of trading businesses had experienced a fall in turnover in early March 2021, compared with normal expectations for this time of year. This is an improvement from earlier in the year, implying that there might be a slight rebound in output in March.
The Flash UK Purchasing Manager’s Index for March paints a similar picture, finding higher levels of business activity in March underpinned by the prospect of the lifting of restrictions. This included ‘forward bookings from domestic consumers, while some manufacturers cited advanced orders from hospitality businesses and high-street retailers’.
Recent figures from the Bank of England (BoE) showed that in March, businesses estimated that their sales in 2021 Q1 would be 20% lower than they otherwise would have been because of Covid-19, with employment 9% lower and investment 21% lower.
Overall, uncertainty continued to fall in March. The percentage of businesses that viewed overall economic uncertainty as high or very high fell from 67% in January and 58% in February to 57% in March, the lowest level since February 2020.
The number of payrolled workers declined by 693,000 between February 2020 and February 2021, while there are 4.7m employees furloughed as of the end of February 2021 that are mostly concentrated in the accommodation and food service activities, and wholesale and retail trade industries.
According to a new report from the Learning and Work Institute and The Prince’s Trust, supported by HSBC UK, youth unemployment will remain high after other areas of the economy begin to recover. The economic cost of youth unemployment, in terms of lost national output, is forecast to rise to £6.9bn in 2022. The fiscal cost of youth unemployment, in the form of lower tax revenue and higher benefit spending, is forecast to be £2.9 bn in 2022.
The long-running scarring cost to young people entering the labour market in 2021, in terms of lost earnings and damage to employment prospects, is forecast to be £14.4bn over the next seven years.
Plan for Growth and second meeting of the Build Back Better Business Council
On Tuesday, Prime Minister Boris Johnson hosted the second meeting of the Build Back Better Business Council, which was established in January as a high-level forum for engagement between businesses and the Government. There, they set out how to make 2021 the ‘year of economic recovery’.
The Plan for Growth looks ahead, building on the best of the Industrial Strategy set out in 2017 and refreshing the Government’s long-term strategy for growth in light of a new economic landscape, including the pandemic, the net zero target and the UK’s new place on the world stage as an independent nation outside the EU.
The Plan for Growth sets the path to invest in infrastructure, skills and innovation to ‘build back better’, while harnessing the strengths, resilience and creative spirit seen from businesses over the past year. This Government will focus on achieving three priority objectives: tackling geographic disparities, enabling the transition to net zero and supporting their vision for Global Britain.
Tuesday’s Council meeting particularly looked at the innovation pillar of the Plan for Growth and discussed the Government’s upcoming Innovation Strategy, due to be published this Summer.
Minimum wage rises
Around two million of the UK’s lowest-paid workers will get a pay rise from Thursday as the minimum wage goes up. The National Living Wage will rise 2.2% to £8.91, the equivalent of over £345 a year for a full-time employee. And for the first time since it came into effect in 2016, more younger people will be eligible for the National Living Wage, as the age threshold will be lowered from 25 to 23 years old. The rise means someone working full time on the National Living Wage from April 2021 will be taking home £5,400 more annually than they were in 2010.
The new rates – announced at the Chancellor’s Spending Review 2020 – were recommended by the independent body the Low Pay Commission, following extensive consultation.