Most advanced economies in Europe and North America experienced large falls in both nominal and real GDP in 2020. While the UK’s fall in nominal GDP was not out of line with these other countries, the recorded fall in UK real GDP of nearly 10 per cent was greater than in most others. This Box considers a range of factors that may explain why the pandemic has apparently taken such a heavy economic toll on the UK.
A potentially important factor is differences in the way that national statistical institutes (NSIs) measure real GDP, and specifically the way government output in health and education – for which market prices are typically unavailable – is captured. There are broadly two approaches NSIs can take: (i) rely on direct measures of output, such as hospital operations performed and numbers of pupils taught; or (ii) use deflated costs or inputs, such as employment, as a proxy for output. The former is regarded as best practice, and the ONS has been a pioneer in the use of such methods. But most other NSIs still produce estimates of the volume of public healthcare and education services that are largely based on the latter approach.
During the lockdowns, many of the output indicators that the ONS rely on to measure public output fell sharply. In health, the prioritisation of coronavirus patients was accompanied by falls in elective care, GP consultations and outpatient services (offset slightly subsequently when NHS Test and Trace activity was better recorded). So, despite extra health spending, recorded real health output fell, leading to a sharp rise in the corresponding implicit price deflator. This is not replicated in countries that primarily use inputs as a proxy. Similarly, school closures led to a reduction in the measured volume of education output in the UK but not in most other countries.a Because of these differences in measurement methods, it is more meaningful at the current juncture to compare the behaviour of output excluding real government consumption. Looked at this way, the disparity in the UK’s economic performance is significantly reduced, although a gap still remains (Chart C).
Chart C: Shortfall in real GDP with and without government consumption
Differences in the sectoral composition of economic activity across countries explains some of the remaining differences. High-contact social consumption activities including recreation, restaurants and hotels have been hit particularly hard by the public health restrictions introduced in many places. The UK economy is somewhat more highly weighted towards this type of spending. Consistent with this, economies like the UK, Italy, and Spain that have large social consumption sectors have also experienced greater falls in consumption (Chart D).
Chart D: Share of social consumption and falls in household consumption
But after accounting for these differences, the primary reason that the UK has suffered a greater economic hit from the pandemic is simply that the UK has experienced higher rates of infection, hospitalisations, and deaths from the virus than other countries. The UK has spent longer in stricter lockdowns than other advanced economies (see Box 2.2 of our November EFO), with that period continuing to increase after the imposition of the latest lockdowns in November and January. In addition to requiring tighter public health restrictions, a greater prevalence of the virus also raises voluntary social distancing which, according to IMF estimates, account for around half of the total decline in economic activity associated with the pandemic.b