Why has the UK economy been among the worst hit by Covid?

According to the latest official data, the UK has seen a larger fall in GDP during the pandemic than almost any country in Europe. The worst hit economies are actually Greece and Spain. But the UK appears to have suffered much more than France, Germany, Italy, or Sweden. This needs some explaining.

Let’s deal first with differences in how GDP is measured – and especially the impact of the pandemic on the output of the public sector. In the words of the official regulator of UK statistics, ‘the UK’s figures on GDP changes are not completely comparable with those of many other countries… because not all countries measure public services output in the conceptually sound way that the UK does’.

I first blogged about this back in August and David Smith was kind enough to quote me at the time. Mike Haynes was also one of the first to explore these issues and continues to do excellent work here. More recently, Ed Conway has picked up on this too.

In short, UK statisticians have put a lot more effort into estimating how much activity actually took place in sectors such as public health and education, rather than simply basing their numbers on how much money was spent in these areas.

The differences are huge. In the third quarter, UK government final consumption expenditure was estimated to be 17% higher in cash terms than the same period a year earlier, but the volume of goods and services that this money had bought was estimated to have fallen by about 9%.

The biggest differences were in healthcare, where public spending fell by 20% in real terms despite a rise of 30% in nominal terms, and education, down 17% in real terms despite a 6% rise in nominal terms.

Part of this gap will presumably reflect the money spent (not necessarily very effectively) on NHS Test and Trace and the high prices paid for PPE. But as the ONS itself explained last August (and again this January) the UK statistics also reflect the impact of schools closures and the fall in output of the NHS as hospitals reduced elective and outpatient activity.

Of course, we can still debate the size of these adjustments and whether the ONS has gone too far. It’s probably fair to describe Andrew Sentence and Simon Briscoe as relatively sceptical. As it happens, I think the ONS has taken the right approach. But I also suspect that the official statistics may have underestimated the overall output of the NHS (in particular) during the pandemic, because the response to a public health emergency required different priorities. In the short term at least, diverting resources to treating Covid patients may have added more value than elective operations.

However, there is no doubt that differences in the measurement of public sector output help to explain the differences in the official GDP data. After all, no other country has reported such a massive divergence between the nominal and real measures of government spending.

Nonetheless, the measurement of public sector output is still only part of the story. The UK has also seen relatively large falls in both consumer spending and business investment.

This is presumably due to a combination of the more severe impact of the pandemic itself on the nation’s health, and how people, businesses and the authorities have responded. There is certainly no getting away from the fact that the UK has suffered a relatively large number of Covid deaths.

At this stage, many people will still want to blame the UK government. I’m sure there are many things that could have been done better, or at least might have led to different GDP outcomes, including the timing and extent of official lockdowns and border closures and the consistency of messaging.

But to be fair, many of the variables which have influenced the impact of the pandemic are largely out of any government’s control. In particular, the UK was always likely to be hit relatively hard because of demographic factors, such as age and population density, and international openness. Indeed, these factors also help to explain the relatively high numbers of Covid deaths in countries like Italy and Belgium.

The structure of the UK economy has also played a part, and in particular the greater dependency on services, especially discretionary consumer spending on activities like eating out (aka ‘ social consumption’) which involve close contact with other people.

This importance of this can be overstated. As the ONS’s Jonathan Athow has shown, the differences between the composition of the UK and other economies are not huge, and partly reflect a greater weight on financial services and real estate activities (which have weathered the pandemic relatively well).

But the remaining differences still go some way towards explaining why UK GDP has been worst hit than economies like Germany and Japan, with their larger manufacturing sectors, and also why Greece and Spain, with their larger tourism industries, have been hit even harder.

Given the doubts about the comparability of the GDP data, it also makes sense to look at other indicators.

In particular, UK unemployment remains relatively low and the UK has seen a relatively small fall in employment during the pandemic. (The impact on jobs is surely a far better measure of the success or failure of economic policies than the fall in GDP, especially when economic activity is being deliberately curtailed in order to save lives.)

And looking forward, the better-than-expected GDP data for October and November make it less likely that the UK is heading for a double-dip recession in late 2020/early 2021, while the faster rollout of the Covid vaccines should mean a quicker and stronger recovery.

In conclusion, international comparisons of GDP need to be made with care. However, it is fair to say that the bigger falls reported in the UK partly reflect more accurate measurement, differences in the composition of the economy, and greater vulnerability to a pandemic in the first place.

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