Covid restrictions put in place to contain the spread of the virus hinder certain types of spending and weigh on economic activity, reducing both demand and supply. But there is evidence that businesses and households worldwide have learned to adapt, and that the most recent restrictions have had less of an effect on economic activity than in the first lockdown.
For example, in 2020 Q2 – when many countries implemented restrictions for the first time – GDP was between 10% and 22% below pre-pandemic levels, but in 2020 Q4, while stringent restrictions were again in place across many countries, GDP was less subdued (Chart A).
In the UK, like elsewhere, the most recent Covid restrictions appear to have had less of an impact on activity than when restrictions were first introduced last year. In 2021 Q1, GDP was around 7½% below its level in 2019 Q4, having been around 20% below that level in 2020 Q2 under the first lockdown. Alongside that, fewer jobs were furloughed at the start of 2021 than during April and May 2020 (Chart B).
Even though Covid restrictions had less of an effect on activity in 2021 Q1 than in the past, the gradual removal of those restrictions – supported by the vaccination programme and much lower numbers of Covid cases – is expected to lead to a sharp recovery in GDP. The fiscal loosening announced in the March Budget is also expected to support near-term growth.
As a result of these factors, output is expected to grow by around 4% in both Q2 and Q3 in the May Monetary Policy Report forecast. By 2021 Q4, GDP is expected to have exceeded its late-2019 level, a little sooner than in the Monetary Policy Committee’s previous projections.
Uncertainties remain around both how the pandemic might evolve and around how people will respond. The MPC will monitor these developments closely.
This post was prepared with the help of Luc Tucker and colleagues in the Current Economic Conditions Division.
This analysis was presented to the Monetary Policy Committee ahead of the May 2021 Monetary Policy Report.
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