GDP and events in history: how the COVID-19 pandemic shocked the UK economy

The COVID-19 pandemic prompted a historic shock to the UK economy, as measured by its gross domestic product (GDP).

Between April and June 2020, the height of the first national lockdown, GDP fell by a record 19.4% before rebounding 17.6% as the country reopened over the summer.

This level of change in GDP has not been seen since ONS measurements began in 1955. But how have other major events in recent history affected GDP?

Economic shocks

1956 to 1957: Suez crisis

Although the 1950s were a period of post-war prosperity, with Prime Minister Harold Macmillan declaring “most of our people have never had it so good”, the Suez Crisis in 1956 preceded a financial downturn in the UK.

International condemnation followed the invasion of Egypt by Britain, France and Israel in response to the nationalisation of the Suez Canal Company.

Under threat of sanctions from the United Nations, tens of millions of pounds were used from UK reserves, with the prospect of sterling being devalued.

Newly released Office for National Statistics (ONS) indicative modelled data suggest by early 1956 annual inflation reached around 7%, as measured by the Consumer Prices Index including owner occupiers’ housing costs (CPIH).

Inflation reached highs of around 7% in the mid 1950s

Indicative modelled estimates of CPIH inflation quarterly % change, Changes to the Bank of England base rate, 1955 to 1969

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In spring and summer of that year GDP shrank for two successive quarters.

The cost of borrowing rose as the Bank of England base rate was raised from 5.0% to 7.0% in September 1957, double the rate seen in early 1955.

1973 to 1975: Oil price shock

The oil crisis in 1973 and subsequent economic downturn was linked to higher inflation because of higher oil prices.

During the Yom Kippur War an oil embargo was put on Western countries by the organisation of the Petroleum Exporting Countries (OPEC), causing oil prices to triple. This may have affected sectors such as manufacturing and distribution, making their products more expensive.

It effectively put an end to the post-war economic recovery and was a period of high inflation and unemployment.

Production stalled because of weak trade and the miners' strikes, leading to a three-day working week in 1974 to save the country's electricity.

Consumer spending was also down, because of high unemployment and low wages.

Indicative modelled data suggest annual CPIH inflation rose from around 7% in January 1973 to 20% in August 1975; this was the highest level recorded, in part as a result of the OPEC oil embargo.

The economic contraction stymied rising house prices. Average house price growth as measured by the House Price Index had risen 50% in the year to early 1973, but slowed dramatically amid the economic crisis.

The UK’s GDP fell by 7.7% from its peak in early 1974 to trough in early 1975. It took three and a half years to fully recover.

1979 to 1981: Winter of discontent

The ‘winter of discontent’ from 1978 to 1979, marked by widespread trade union strikes, paved the way for the election of Margaret Thatcher and a shift in economic policy.

That winter was a period of rising inflation and high unemployment. Energy prices rose sharply in 1979, caused by a drop in oil production in the wake of the Iranian Revolution.

In a bid to curb inflation strict fiscal policy of cutting public spending alongside high interest rates and high taxes was pursued.

Household budgets were tightened, with total household spending falling by 4.2% in the three months to September 1979, the largest quarterly drop seen in the data to this point.

By spring 1980 indicative modelled estimates suggest CPIH inflation rose to around 15%, and by the following year more than 1 in 10 adults were unemployed; this was a 50 year high in the unemployment rate of 10.2%.

GDP fell for five successive quarters between 1980 and 1981.

The unemployment rate reached highs of 11.9% by 1984

Indicative modelled estimates of CPIH inflation quarterly % change, unemployment rate (16 years and over), household expenditure quarterly % change, House Price Index 12 month % change, 1970 to 1986

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At the 1981 budget, hundreds of economists in Britain wrote a joint letter protesting against the tightness of fiscal policy, with proposals to raise taxes and cut public spending further.

1984 to 1985: Miners' strike

The 12-month-long miners' strike between 1984 and 1985 resulted in a loss of production, and the closure of collieries since the 1960s led to mass unemployment.

At the height of the strikes 142,000 miners were involved, and an estimated 27 million person-days of work were lost throughout the dispute.

By the second quarter of 1984 unemployment had reached record levels at 11.9%, having risen consistently during the early part of the decade.

The economic contraction was an extension of the downturn seen in the late 1970s and early 1980s. While inflation had come under control, the fiscal policies of reduced public spending and privatisation remained.

The cost of borrowing was rising once more, with the bank rate rising by more than four percentage points between November 1984 and January 1985, to just under 14%

The widespread loss of workers in the mining industry was "structural unemployment", in which a specific industry or sector is affected. This in turn became long-term unemployment, leading to increasing poverty and inequality.

The miners’ strike ended in March 1985, signalling the end of widespread industrial action that had been seen throughout the 1970s and 1980s.

1990s: Economic downturn and Black Wednesday

The downturn of 1991 saw high interest rates, falling house prices and rising unemployment, along with a global economic downturn.

GDP decreased by 2.1% from the peak in spring 1990 to the trough in autumn 1991. Unemployment rates rose from 6.9% in early 1990 to 10.6% by early 1993.

CPIH inflation is estimated to have reached around 9% by the winter of 1991, prompting lower spending and reduced investment in UK sectors.

Average house prices saw a sustained decline between April 1990 and September 1993, falling by 7.4% in the year to December 1992.

Average house prices and spending fell in the early 1990s

CPIH inflation quarterly % change, unemployment rate (16 years and over), household expenditure quarterly % change, House Price Index 12 month % change, 1987 to 1999

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In September 1992, after attempts to prop up the value of the pound failed, the UK government withdraw sterling from the Exchange Rate Mechanism.

Black Wednesday, as it became known, wiped billions of pounds from the stock market and is estimated to have cost the UK Treasury £3.3 billion.

The period of stability after this point has been dubbed the Great Moderation. The UK experienced almost 16 consecutive years of economic growth after the 1991 downturn; this was the longest continued expansion on record.

This paused the continuous cycle of boom and bust previously seen in the post-war economy.

2008: Global Financial Crisis

A global financial crisis, commonly referred to at the time as the 'credit crunch', began in 2008.

Firm closures and widespread job losses caused the rate of unemployment to rise from 5.2% in 2008 to a high of 8.4% in 2011.

Redundancy levels rose by 160% to 311,949 between January to March 2008 and February to April 2009. The number of people claiming unemployment benefits more than doubled between January 2008 and October 2009, reaching the highest level in over 12 years.

Household expenditure fell by 4.8% from late 2007 to mid-2009 as incomes stagnated.

Spending and average house prices dropped during the 2008 global financial crisis

CPIH inflation quarterly % change, unemployment rate (16 years and over), household expenditure quarterly % change, House Price Index 12 month % change, 2000 to 2013

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The crisis caused a substantial fall in average UK house prices, which dropped by more than 15% in the year to February 2009.

GDP fell by 5.9% from peak to trough in this period, falling for five successive quarters. It took more than five years for GDP to recover, and nearly eight years for GDP per head to recover.

In the wake of the financial crash interest rates were cut to historic lows in an effort to stimulate the economy.

Between October 2008 and March 2009, the Bank of England base rate was lowered seven times, reducing the cost of borrowing from 5.0% to 0.5%.

Interest rates were cut to historic lows between 2008 and 2009

Changes to the Bank of England base rate, June 1972 to May 2022

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Rates lingered below 1.0% for the following 13 years, only rising back to this level in May 2022.

2016 to present: Brexit

The UK voted to leave the European Union in June 2016 and officially left the single market and customs union at the end of the transition period on 31 December 2020, which prompted an initial drop in trade with the bloc.

Isolating the economic impacts of Brexit is difficult because it has overlapped with the COVID-19 pandemic, global supply chain disruption and energy and food price shocks.

2019 to present: The COVID-19 pandemic

The nationwide lockdown undertaken to protect the country from the onset of the COVID-19 pandemic led to an unprecedented fall in UK GDP.

Public health measures including social distancing, travel restrictions and closure of non-essential shops drove a 19.8% fall in GDP between April and June 2020.

Household spending fell by over 20% over this period, the largest quarterly contraction on record, which was driven by falls in spending on restaurants, hotels, transport and recreation.

Spending fell by a record 20% during the first COVID-19 lockdown

CPIH inflation quarterly % change, unemployment rate (16 years and over), household expenditure quarterly % change, House Price Index 12 month % change, 2014 to 2022

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The furlough scheme, affecting a total of 11.6 million jobs, significantly curbed the labour market impact, with the unemployment rate rising from 3.8% at the end of 2019 to 5.2% by the end of 2020.

As restrictions were lifted GDP largely recovered by 17.6% in the third quarter of 2020 – between July and September.

Household spending rose by 19.6% in the third quarter of 2020, with higher spending in restaurants, hotels and on transport. In the year to June 2021, average house prices rose 13.5%.

Borrowing costs were cut to historic lows as the bank rate was lowered to 0.1% in March 2020. In the year to June 2021 average house prices rose by 13.5%, helped by the waiving of stamp duty on house purchases up to £500,000

Despite a 1.2% drop in GDP over the first three months of 2021 with the emergence of the Delta variant and subsequent lockdown, the rest of the year saw incremental growth.

Household spending rose once more in spring (8.5%) and summer (2.6%) 2021 – making a steady return to pre-coronavirus pandemic levels.

GDP had returned to pre-coronavirus pandemic levels by the first quarter of 2022.

After a period of historic lows, CPIH inflation rose from 0.5% in August 2020 to 7.8% by April 2022, precipitated by rising fuel costs and the war in Ukraine.

Special events

Special events in our nation’s history have had significant impacts on the economy, including the London 2012 Olympics and Royal celebrations.

In June 2002 production in the UK fell by 5.4% amid the Golden Jubilee celebrations. The spring bank holiday had moved from May to June, reducing the number of hours worked that month.

In 2012 celebrations for the 60th year of Queen Elizabeth II’s reign, with extra bank holidays in April and June, again caused production in the UK to fall.

The UK also experienced the wettest April to June on record in 2012, which is likely to have affected sales, expenditure, distribution, and agriculture.

The Jubilee celebrations in 2022 and 2012 impacted production and GDP

Total production, gross domestic product, quarterly % change, UK, 2000 to 2013

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GDP contracted by 0.1% in the second quarter of 2012.

This downturn was balanced with the boom associated with the London 2012 Olympic and Paralympic games between July and September, when GDP grew by 1.2%. This was the highest growth for nearly seven years, and the UK's output increased by 1.5% just in July 2012.

This was driven by the food and beverage industries, accommodation, employment agencies, and creative arts and entertainment.

Sales of Olympics tickets amounted to £580 million (or 0.1% of GDP) and contributed 0.2 percentage points to overall growth.

What is GDP?

Gross domestic product, or GDP, is a measure of the combined economic activity of all the people, businesses and government of a country.

It helps assess the overall health of the economy and can be compared to other nations. It includes;

• the value of all goods and services
• spending across households, businesses, charities and government
• all income, including wages, profits and trade

Between 1955 and 2020, the largest quarterly fall in the UK’s GDP since ONS records began was in early 1974, when it fell by 2.7%.

According to Bank of England estimates, the largest annual swings in GDP prior to 1955 included:

• an 11.5% rise as the country pivoted to a wartime economy in 1939
• a 10.1% fall during the Great Depression of 1921

While quarterly estimates have been recorded since 1955, the ONS has been publishing new monthly estimates of GDP since 2018.

Sources:

• GDP first quarterly estimate time series
• Consumer price inflation, historical estimates, UK: 1950-1988
• House Price Index, March 2022
• Household final consumption expenditure, May 2022
• Unemployment rate, May 2022