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Coronavirus and the Effects on UK GDP Article Coronavirus and the effects on UK GDP How the global coronavirus (COVID-19) pandemic and the wider containment efforts are expected to impact on UK gross domestic product (GDP) as well as some of the challenges that National Statistical Institutes are likely to face. Contact: Release date: Next release: Sumit Dey-Chowdhury 6 May 2020 To be announced [email protected]. uk +44 (0)2075 928622 Table of contents 1. Executive summary 2. Background 3. The circular flow of income 4. The treatment of non-market output in GDP 5. The treatment of the CJRS and SEISS in GDP 6. Practical challenges 7. Publications 8. Conclusions 9. Authors Page 1 of 14 1 . Executive summary Forecasters expect the coronavirus (COVID-19) pandemic to lead to a contraction in the UK and global economy this year, reflecting how it has led to a reduction in the demand for goods and services and the impact on the ability of businesses to supply those products. The impact is expected to reflect the length of the pandemic as well as the public health restrictions imposed and other voluntary social distancing measures. The response to COVID-19 will also impact on the ability of National Statistical Institutes (NSIs) to compile estimates of gross domestic product (GDP), inflation and the labour market. We are responding to these challenges so that we capture the economic activity of the UK in line with the latest international guidance. In this article, we describe how those transactions that are most likely to be impacted by the pandemic will be reflected in the production, income and expenditure measures of GDP ( Section 3), including how we have reflected this accordingly in our volume-based estimates of health and education output ( Section 4). We also explain how we have been carrying out research on these topics to provide the most informed estimates available at this stage. We explain how we propose to treat the Coronavirus Job Retention Scheme (CJRS) and Self-Employment Income Support Scheme (SEISS) in the UK National Accounts and the public sector finances ( Section 5). This follows the latest international guidance and will feature as part of the production and income approaches to measuring GDP. We outline the significant practical challenges that we expect to face in compiling GDP this year, including producing imputations and forecasts, carrying out seasonal adjustment, and the process of deflation. We then propose how we will look to tackle some of these considerations, building on the lessons learned from compiling GDP through the 2008 to 2009 global financial crisis ( Section 6). 2 . Background More about coronavirus Find the latest on coronavirus (COVID-19) in the UK. All ONS analysis, summarised in our coronavirus roundup. View all coronavirus data. Find out how our studies and surveys are serving public need. The first case of the coronavirus (COVID-19) was reported to the World Health Organization (WHO) in December 2019 and was subsequently declared a public health emergency of international concern (PHEIC). This global pandemic is now expected to impact on the economic outlook for some time to come. The latest available business surveys in the UK and real-time indicators point to a significant decline in economic activity, while the initial estimates for other countries highlight the extent of the impacts so far on the real economy. The UK National Accounts provide a consistent framework to understand these impacts, offering an integrated description of all economic activity that takes place within the UK – including gross domestic product (GDP). This article is aimed at those with some background knowledge of the national accounts. The aim is to explain how we expect COVID-19 to affect estimates of UK GDP in theory and in practice. Page 2 of 14 Section 3 provides a theoretical framework for understanding how GDP may be impacted, reflecting some the most recent literature. Section 4 and Section 5 include an overview of the main conceptual points for how we record estimates of GDP, which are more technical in nature. Section 6 explains the practical challenges that National Statistical Institutes (NSIs) are expected to face in compiling GDP this year and how we are responding. We have produced additional articles that explain how COVID-19 is impacting on the production of our estimates of inflation and the labour market, which also feed into the compilation of the UK National Accounts. We will also explain in a forthcoming article how this will then impact on how we reconcile our full range of productivity estimates. We will be publishing further articles in June that will cover how any effects will be treated in the institutional sector accounts and the UK Balance of Payments to provide a holistic picture of the theoretical and practical effects of how we measure the UK economy. 3 . The circular flow of income The International Monetary Fund (IMF) forecasts a fall in the UK and global economy this year that would be larger than the declines experienced in the 2008 to 2009 global financial crisis. This reflects how "infections reduce labour supply", how "quarantines, regional lockdowns, and social distancing ... curtail mobility" and the fact that "workplace closures disrupt supply chains and lower productivity". It also highlights how the effects of "layoffs, income declines, fear of contagion, and heightened uncertainty" will weigh on gross domestic product (GDP). The Resolution Foundation has highlighted that it is "the duration of the outbreak, the public health restrictions imposed to contain the spread of the virus, and other voluntary social distancing measures that people take to reduce their chances of catching it" that determine the initial economic impacts. These considerations are also a helpful reference point to trace through the effects of a phased re-opening of the UK economy, which will show up accordingly in our estimates of GDP. This reflects how these affect the circular flow of income, which captures the three approaches to measuring GDP. In theory, these are equivalent to one another. The three approaches are: production: this is the value of the output of goods and services that are produced, less the intermediate inputs used in their production, plus any taxes net of subsidies on those products income: this records the value of income that is generated by the sales of production of goods and services, plus any taxes net of subsidies on production and products expenditure: this is the value of the sum of all final expenditures (less imports) within an economy Based on recent external studies1, we look at the anticipated economic impacts of the coronavirus (COVID-19) on the UK through the framework of the national accounts. This is to explain how these effects would be recorded in the production, income and expenditure estimates of GDP. 2 As such, these are not to be considered as forecasts but rather as illustrative examples, particularly as COVID-19 has led to a sharp change in the structure of production, income and expenditure so there will be much uncertainty around how this may play out in practice. We will provide a more informed picture of the impacts when these are published. Production It is expected that there will be lower levels of production in response to the lower demand for goods and services in the UK, which will be reflected in falling sales and in turn business closures. 3 There will also be reduced levels of employment and hours worked4, as labour supply will also be impacted by employees voluntarily and involuntarily staying at home. Production processes for many industries are highly integrated in the global economy so the disruption to, and in many cases breakdown of, supply chains will likely lead to lower production. However, there may be some industries that also experience an increase in production in response to COVID-19. Page 3 of 14 There will be some industries that are more exposed to the COVID-19 pandemic, specifically those that are most impacted by the restrictions in place and the social distancing that is being undertaken. In the service industries, the impact will be widespread. Recent analysis highlights how previous pandemics have shown that "travel, hospitality, tourism, and face-to-face retail services are especially vulnerable, as are industries where employees have to work in close quarters", which reflect those industries that are most exposed to the effects of social distancing. Those that require direct contact between consumers and service providers and/or those instances where there are enforced closures of those non-essential businesses and venues will be most impacted, such as taxi drivers and hairdressers. The restrictions on movement will also have a pronounced effect on travel (road, rail, sea and air). The cancellation of many sporting events and the closure of theatres and cinemas will have an adverse impact on recreational services. There may be some service industries or parts of industries that will see an increase in activity, including those restaurants that have switched to take-away services or e-learning providers that may have seen an increase in demand for online training. The construction industry is also expected to be impacted by containment measures that have affected labour availability, as it will be unlikely that a significant proportion of these workers will be able to work from home. It is expected that the most adversely affected parts of the manufacturing industry will be those that are exposed to global value chains, those that are labour-intensive and/or those that are more export-intensive, given the expected slowdown in the global economy. However, there may also be an increase in demand for some manufactured goods, such as those of pharmaceutical products and medical equipment.
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