How has Covid affected the UK economy and what can we expect in 2022?


As we enter 2022, the question of Covid is still at the forefront of many people’s minds. Since the first lockdown was announced in March 2020, there have been a number of changes to Covid guidelines within the UK and various adjustments to compulsory travel rules.

The UK economy has suffered massively over the past two years due to these necessary restrictions. According to the Bank of England, the first year of the pandemic saw the real GDP level decline by -25%. Parliament described this as ‘the steepest drop since consistent records began in 1948 and equal to the decline in 1921 on unofficial estimates.’

Information from Office of National Statistics

Despite the sharp drop at the beginning of the first pandemic, the spring and summer of 2020 saw a substantial rise in economic activity before case numbers rose again in winter, leading to further lockdowns and economic struggles at the beginning of 2021 – although this economic drop was not as severe as the levels seen in the first year of the pandemic.

According to the Guardian, the spring of 2021 marked the beginning of a strong recovery for the UK economy, which saw GDP rise to just -0.5% in October compared to pre-pandemic levels. As shown on the graph above, this has been described by economists as a ‘V-shaped recession’: a drop of activity in March and April of 2020 followed by a ‘brisk – if occasionally interrupted – recovery.’

What can we expect for the UK economy in 2022?

While the UK has regained the ground lost at the beginning of pandemic, Parliament predicted that the crisis may have caused ‘permanent damage’ to our economy. In an estimate published in October 2021, the Office for Budget Responsibility (OBR) suggests that the level of GDP will lower by 2% compared to how it may have fared if the pandemic had not happened.

The question now is whether the UK can recover this pre-pandemic trend, although this will be difficult given the predicted tough months ahead of us in 2022. January, it seems, will maintain the struggles we experienced in December 2021 due to the Omicron variant, especially in terms of staff absences within the hospitality, retail and tourism sectors. Likewise, small businesses hit by the pandemic no longer have access to the furlough scheme of previous lockdowns, meaning their recovery is reliant on the economy pushing through the final stages of the pandemic without further difficulties.

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According to the Financial Times, however, the rollout of the vaccination programme has dramatically lessened the impact of Omicron. Economists have even gone so far as to predict that by spring 2022, we’ll look back on Omicron merely as ‘an annoying blip for the UK economy.’ Likewise, Samuel Tombs, UK economist at Pantheon Macroeconomics, stated that: ‘In the second quarter [of 2022], gross domestic product should be close to the level it would have reached had the new variant not emerged.’ This is hopeful news for businesses across the UK, and will provide much-needed relief for those who have struggled to stay afloat during 2020 and 2021.

The rising cost of living in 2022

While economists are hopeful about economic recovery in 2022, there are other factors to consider: specifically, inflation and the rising cost of living.

As shown below, inflation rose 5.1% in 2021. Firstly, the increased demand for oil and gas has made energy prices more expensive, leading to higher prices for households and businesses. On top of this, there have been shortages of semiconductor chips and building materials such as timber and plastic, meaning technology and construction industries are experiencing serious supply issues. The good old laws of supply and demand mean this has led to rising costs.

It is expected that inflation levels will rise to 6% by Spring of 2022, according to the Bank of England. Households will also be faced with higher tax bills – as of April 2022, National Insurance contributions will also include a health and social care levy of 1.25%. The extra money – around £12 billion across the UK – will be targeted on ‘easing pressure on the NHS’ before being directed towards the social care system.

April will also see the beginning of more expensive electric and gas bills as the cap on energy bills – which was introduced in 2019 – will increase to account for the rising energy costs. This is set to be announced in February and implemented on 1st April, so it’s definitely something to keep an eye on in the coming months.

Overall, 2022 will be a mixed year for the UK economy. On one hand, restrictions being lifted at the end of January will put us in good stead to climb back to pre-pandemic GDP levels. However, people will feel the crunch at home with higher bills this year, which will undoubtedly be reflected in our consumer habits. One thing is clear: the effects of the pandemic are still a long way from being over – but at least we’re in a far better position this year to tackle the economic difficulties we may face.

Likewise, there is light on the horizon when it comes to our personal lives, as restrictions end and we can return to our normal day-to-day. Hopefully, 2022 will be the year in which many can reignite pursuits which have been on pause during the pandemic and, more importantly, focus on spending more time with family and friends.


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