Literature Review: The Impact of the COVID-19
pandemic on the UK’s Macroeconomic
Objectives.
Word Count: 1595 Words
Contents
Title Page
Page 1
Contents
Page 2
Literature Review
Page 3
Background
Page 3
Economic Growth: GDP
Page 3
Environmental Impact: Air Pollution
Page 5
Inflation: Cost-of-living Crisis
Page 5
Summary
Page 6
Bibliograph
Page 7
2
Background
The rapid spread on the COVID-19 virus in the UK caused cases to rise to 22,241,447 and the
official deaths of 207,922 citizens as of the 11th of November 2022 (UK Health Security
Agency, 2022). Moreover, to limit the spread of the virus, the British government
implemented a national lockdown and guidelines for social interactions (Institute of
Government, 2022), which caused vast losses to the British economy. The focus of this
literature review is to evaluate the impact of the COVID-19 pandemic on macroeconomic
objectives; by looking at the impact of the pandemic on economic growth, environmental
impact and inflation.
Economic Growth: GDP
Regarded as one of the best methods of deducing the size of an economy, economic growth
is calculated by looking at the change in the country’s gross domestic product (GDP) annually
(Thangavelu, 2019). GDP will only change if there is a change in household consumption,
business investment, government spending and/or net exports.
Household consumption makes up the largest portion of the British economy and is regarded
as the most volatile component. As the UK went into lockdown and social distancing
guidelines were implemented social consumption decreased in the UK, because citizens were
unable to travel for leisure, eat at restaurants and other social activities (Lee, Khaliq and DeyChowdhury, 2022). Therefore, household consumption in the UK decreased by 24.0% in 20201
(ONS, 2022a). Moreover, incomes of British households decreased by between 17% and 27%
1
The second quarter of each year was used for the calculation of percentage change in household
consumption.
3
from before the pandemic (Collard et al., 2021). As household consumption depends on the
amount of disposable income possessed by households, it may be claimed that the decrease
in household disposable income led to a decrease in household consumption. The COVID-19
pandemic caused massive uncertainty regarding the effects of the pandemic on the UK and
the British economy leading to business confidence in the economy to decrease, it is
estimated that approximately half of the British economy’s contraction is due to uncertainty
(Baker et al., 2020). As a result, business investment in the British economy decreased by 21%
in 20202 (ONS, 2022b). To help the struggling British people and economy the government
increased their spending by giving out large stimulus packages which provided British citizens
and businesses financial aid (Brien and Keep, 2021). This led to government spending to
increase by 16.9% (Statista, n.d.). Despite a fall in trade of goods and services, the UK had
experienced a current account surplus of £6.3 billion which is 8.0% higher than the previous
year. This may be caused by a more than proportional decrease in imports than in exports
(Viatilingam, 2022).
Even though government spending and net exports increased, the economy contracted by
9.30% in 2020 (ONS, 2022c) due to the decreased in household consumption and business
investment, displaying the largest economic contraction since 1709 (Goodman, 2022). This
may be because the decrease in the value of household consumption and business
investment was higher than the increase in the value of government spending and net
exports.
Furthermore, in the next year the economy slightly recovered with household income
increasing by 24.7% (ONS, 2022a), business investment increasing by 13.3% (ONS, 2022b),
government spending decreasing by 3.80% (Statista, n.d.) and net exports decreasing by
3.80% (The World Bank, n.d.); causing the economy to grow by 7.40% in 2021 (ONS, 2022c).
This is an improvement in the UK’s GDP from 2020, however, it is still under the pre-pandemic
level which may mean that the pandemic led to a large loss for the British economy and the
economy has not yet recovered the loss. Though, it may be argued that the decrease in GDP
was not solely caused by the pandemic. 3 Moreover, there may be other methods of
calculating the state of the British economy rather than using GDP (Hawkes, 2021).4
2
The second quarter of each year was used for the calculation of percentage change in business investment.
Brexit was officially completed at the beginning of 2020 which saw the withdrawal of the UK from the
European Union (EU). The economic impact of not being able to trade with EU tariff-free and the uncertainty
of having a no-deal Brexit may have also negatively impacted the UK’s GDP (Revis, 2020).
4
Some other calculations of economic health include Human Development Index (HDI), Genuine Progress
Index (GPI), Happy Planet Index (HPI) and others (Hawkes, 2021).
3
4
Environmental Impact: Air Pollution
The British government is committed to reduce their impact on the environment and reduce
greenhouse emissions to a net-zero (BBC, 2021). As the national lockdown began, productionbased carbon emissions decreased by 39.43 million tonnes indicating a large drop in
emissions (Global Carbon Project, 2021). Moreover, nitrogen oxide and fine particulate
matter decreased in concentration by 38.3% and 16.5% (Quinio and Enenkel, 2021). These
may have fundamental benefits for British citizens because nitrogen oxide and fine particulate
matter are known to have an adverse effect on health (World Health Organisation, 2003).5
This meant that air quality in the UK improved, this was displayed in the IQAir ranking of
countries with the worst air quality. The UK’s rank fell from 78th in 2019 (IQAir, 2020) to 92nd
in 2020 (IQAir, 2021) and eventually to 94th in 2021 (IQAir, 2022).
The improvement in air quality may have been caused by a reduction in vehicle traffic and
flights in the UK due to the national lock down and strict COVID-19 guidelines (Jephcote et al.,
2020). In summary, it may be concluded that the national lockdown caused by the COVID-19
may have led to improvements in air quality throughout the UK which may have long-term
health benefits for British citizens (World Health Organisation, 2003).
Inflation: Cost of Living Crisis
The government aims to have a target inflation rate of 2% (Siddiqui, 2022) because it means
that prices in the economy increase steadily rather than having large fluctuations in the
inflation rate which may have negative impacts on the British people and economy.6 There
are three types of inflation; cost-push inflation, demand pull inflation and built-in inflation
(Siddiqui, 2022). The UK is thought to be going through a mixture of demand-pull and costpush inflation. Rising commodity prices, supply chain disruptions, rising energy prices and
increased cost of shipping caused by the pandemic may have led to cost-push inflation
(Ilzetzki, 2022). As the national lockdown eased in the UK, consumers started to demand more
products which the suppliers struggled to meet which may have caused demand-pull inflation
(Inman, 2021).
5
Exposure to nitrogen oxide and fine particulate matter has been known to cause cardiovascular and
respiratory diseases and such exposure was associated with increased mortality rates in European countries
(World Health Organisation, 2003). It is estimated that 40,000 early deaths are annually caused in the UK due
to air pollution and bad air quality (Gatenby, 2020).
6
The largest cost of inflation is regarded to be the fall in real incomes for consumers because as prices of
goods and services start to rise in the UK and wages remain sticky, the real disposable incomes of consumers
may decrease. Therefore, consumers may be able to afford less goods and services with the same nominal
income and may decrease their standard of living (Oner, 2022).
5
In the first year of the pandemic the inflation rate stayed below the 2% inflation target
(Siddiqui, 2022). However, in March 2021 as restriction started to ease inflation started to
increase and reaching a current high of 11.1% in September 2022 (ONS, 2022d). This caused
real disposable incomes to decrease in the UK because inflation was rising at a faster rate
than the increase in nominal income. As a result, purchasing power of British citizens
decreased as they were not able to purchase as many goods and services as before, which
caused the cost-of-living crisis to occur (TLDR News, 2022). This may imply that the COVID-19
pandemic led to the cost-of-living crisis to occur and the standard of living in the UK to
decrease. Though, it may be argued that the pandemic was not the only factor that caused
inflation in the UK.7
Moreover, CPI may be seen as the best method of measuring the increase in prices for
consumers, however, it also has its limitations. The CPI does not consider substitution bias8,
changes in product quality and may have a time lag to include new products that the average
consumer may be using (Baldridge, 2022).
7
The Russia-Ukraine conflict has also led to increased energy and food prices in the UK has increased
significantly (Francis-Devine et al., 2022). Additionally, OPEC reduced output by 2 million barrels daily which
likely added to the rise in petrol prices in the UK and the fluctuations in inflation (Lawler, 2022).
8
This is when prices of a product rises and consumers may shift to a cheaper alternative, however, since the
basket of products is fixed so the CPI may only consider the more expensive product and lead to a misleading
inflation rate (Baldridge, 2022).
6
Summary
It may be concluded that the COVID-19 pandemic led to significant losses to the British
economy and people. Despite, the improvement in air quality throughout the country, the
economy faced several negative impacts due to the pandemic. The economy shrunk
exceptionally and has not yet returned to pre-pandemic levels (ONS, 2022c). Record high
inflation led to a cost-of-living crisis to occur in the UK (ONS, 2022d).
Further research into this topic may look at the impact of the pandemic on other
macroeconomic objectives9 and analyse the British economy’s possible recovery in the future.
9
These may include unemployment, balance of payments and redistribution of income (Agarwal, 2022).
7
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