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Omicron likely to slow UK bounceback from economic Covid shock | Economic growth (GDP)


It has taken a year and a half but the UK economy has now regained the ground lost during the early stages of the Covid-19 pandemic. A better than anticipated performance last November means national output is now 0.7% higher than it was in February 2020.

Other countries reached this milestone sooner, with the US for example already operating well above its previous peak. Even so, Britain has experienced what economists call a V-shaped recession, with a precipitous drop in activity in March and April 2020 followed by a brisk – if occasionally interrupted – recovery.

That pattern is explained by the nature of the Covid shock. Governments imposed lockdowns in an attempt to prevent the virus spreading, and once the restrictions were eased businesses that had been closed reopened and economies bounced back. The UK economy contracted by less during the financial crisis of 2008-09 than it did in 2020 but took much longer to regain the lost ground.

November’s 0.9% monthly increase in output was due to a combination of factors: the easing of supply chain bottlenecks that had been hitting manufacturing and construction firms; consumers shopping early for Christmas; and people feeling more confident about going out to enjoy themselves.

The arrival of the Omicron variant has muddied the waters. It looks inevitable that output fell in December owing to widespread staff absences, the introduction of the government’s plan B restrictions and individuals becoming more cautious.

January will be another tough month so the chances are that the economy will fall back below its February 2020 peak. If, as expected, the government decides to ease restrictions in England later this month, output will recover again in February and March.

But as Paul Dales, of Capital Economics notes, April will see the economy hit by a double whammy of rocketing energy bills and higher taxes. As is often the case with the UK economy, it will be one step forward, one step back.

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