Tag: sustainable economic recovery

Three international agencies, the IMF, the European Commission and the OECD, all publish six-monthly forecasts for a range of countries. As each agency’s forecasts have been published this year, so the forecasts for economic growth and other macroeconomic indicators, such as unemployment, have got more dire.

The IMF was the first to report. Its World Economic Outlook, published on 14 April, forecast that in the UK real GDP would fall by 6.5% in 2020 and rise by 4% in 2021 (not enough to restore GDP to 2019 levels); in the USA it would fall by 5.9% this year and rise by 4.7% next year; in the eurozone it would fall by 7.5% this year and rise by 4.7% next.

The European Commission was next to report. Its AMECO database was published on 6 May. This forecast that UK real GDP would fall by 8.3% this year and rise by 6% next; in the USA it would fall by 6.5% this year and rise by 4.9% next; in the eurozone it would fall by 7.7% this year and rise by 6.3% next.

The latest to report was the OECD on 10 June. The OECD Economic Outlook was the most gloomy. In fact, it produced two sets of forecasts.

The first, more optimistic one (but still more gloomy than the forecasts of the other two agencies) was based on the assumption that lockdowns would continue to be lifted and that there would be no second outbreak later in the year. This ‘single-hit scenario’ forecast that UK real GDP would fall by 11.5% this year and rise by 9% next (a similar picture to France and Italy); in the USA it would fall by 7.3% this year and rise by 4.1% next; in the eurozone it would fall by 9.1% this year and rise by 6.5% next.

The second set of OECD forecasts was based on the assumption that there would be a second wave of the virus and that lockdowns would have to be reinstated. Under this ‘double-hit scenario’, the UK’s GDP is forecast to fall by 14.0% this year and rise by 5.0 per cent next; in the USA it would fall by 8.5% this year and rise by 1.9% next; in the eurozone it would fall by 11.5% this year and rise by 3.5% next.

The first chart shows the four sets of forecasts (including two from the OECD) for a range of countries. The first four bars for each country are the forecasts for 2020; the other four bars for each country are for 2021. (Click here for a PowerPoint of the chart.)

The second chart shows unemployment rates from 2006. The figures for 2020 and 2021 are OECD forecasts based on the double-hit assumption. You can clearly see the dramatic rise in unemployment in all the countries in 2020. In some cases it is forecast that there will be a further rise in 2021. (Click here for a PowerPoint of the chart.)

As the OECD states:

In both scenarios, the recovery, after an initial, rapid resumption of activity, will take a long time to bring output back to pre-pandemic levels, and the crisis will leave long-lasting scars – a fall in living standards, high unemployment and weak investment. Job losses in the most affected sectors, such as tourism, hospitality and entertainment, will particularly hit low-skilled, young, and informal workers.

But why have the forecasts got gloomier? There are both demand- and supply-side reasons.

Aggregate demand has fallen more dramatically than originally anticipated. Lockdowns have lasted longer in many countries than governments had initially thought, with partial lockdowns, which replace them, taking a long time to lift. With less opportunity for people to go out and spend, consumption has fallen and saving has risen. Businesses that have shut, some permanently, have laid off workers or they have been furloughed on reduced incomes. This too has reduced spending. Even when travel restrictions are lifted, many people are reluctant to take holidays at home and abroad and to use public transport for fear of catching the virus. This reluctance has been higher than originally anticipated. Again, spending is lower than before. Even when restaurants, bars and other public venues are reopened, most operate at less than full capacity to allow for social distancing. Uncertainty about the future has discouraged firms from investing, adding to the fall in demand.

On the supply side, there has been considerable damage to capacity, with firms closing and both new and replacement investment being put on hold. Confidence in many sectors has plummeted as shown in the third chart which looks at business and consumer confidence in the EU. (Click here for a PowerPoint of the above chart.) Lack of confidence directly affects investment with both supply- and demand-side consequences.

Achieving a sustained recovery will require deft political and economic judgements by policymakers. What is more, people are increasingly calling for a different type of economy – one where growth is sustainable with less pollution and degradation of the environment and one where growth is more inclusive, where the benefits are shared more equally. As Angel Gurría, OECD Secretary-General, states in his speech launching the latest OECD Economic Outlook:

The aim should not be to go back to normal – normal was what got us where we are now.


OECD publications


  1. Why has the UK economy been particularly badly it by the Covid-19 pandemic?
  2. What will determine the size and timing of the ‘bounce back’?
  3. Why will the pandemic have “dire and long-lasting consequences for people, firms and governments”?
  4. Why have many people on low incomes faced harsher consequences than those on higher incomes?
  5. What are the likely environmental impacts of the pandemic and government measures to mitigate the effects?

In our blog How sustainable is UK consumer spending? we considered concerns of some commentators that consumer spending was growing unduly quickly given the absence of any sustained growth in disposable income. The Second Estimate of GDP, Q2 2013 reports that the economy grew by 0.7 per cent in the second quarter of the year, with household expenditure growing by 0.4 per cent.

Because household spending makes up about two-thirds of aggregate demand in the UK it is important to keep an eye on it. The latest figures show that the real value of consumer spending by British households has risen in each quarter since 2011 Q4. In other words, the volume of household purchases has risen for seven consecutive quarters. Over the period, the growth in real consumer spending has averaged 0.4 per cent per quarter.

The chart helps to demonstrate the stark turnaround in the growth in consumer spending. Over the period from 2008 Q1 to 2011 Q3, real consumer spending typically fell by 0.4 per cent each quarter. As we noted in our previous blog, this was a period when the global financial system was in distress, with the availability of credit severely dampened, but also a period when households were concerned about their own financial balances and the future prospects for growth. Over the same period, real GDP typically fell by a little under 0.3 per cent each quarter. (Click here to download a PowerPoint of the chart.)

The real value of consumer spending has yet to return to its 2007 Q4 peak (£242 billion at 2010 prices). In 2013 Q2 the real value of consumer spending is estimated still to be 3 per cent below this level (£235 billion at 2010 prices). These figures are mirrored by the economy at large. Real GDP peaked in 2008 Q1 (£393 billion at 2010 prices). Despite the back-to-back quarterly increases in real GDP of 0.3 per cent in Q1 and 0.7 per cent in Q2, output in 2013 Q2 (£380 billion at 2010 prices) remains 3.2 per cent below the 2008 Q1 peak.

While real consumption values are below their 2007 Q4 peak, the concern is whether current rates of growth in consumer spending are sustainable. In particular, should this growth cause the household sector financial distress there would be real pain for the economy further down the line. Some commentators argue that the latest GDP figures are consistent with a more balanced recovery. In Q2 economic growth was supported too by other parts of the economy. For instance, we saw a 3.6 per cent rise in export volumes and a 1.7 per cent rise in gross fixed capital formation (i.e. investment expenditure).

Nonetheless, it is the protracted period over which consumer spending has been growing robustly that concerns some economists. Hence, we will need to continue to monitor the growth in all components of aggregate demand and, in particular, changes in household consumption, income, saving and borrowing.


Second Estimate of GDP, Q2 2013 Dataset Office for National Statistics


New articles
UK economic growth revised up to 0.7% BBC News, (23/8/13)
UK GDP revised up to 0.7pc in second quarter: reaction Telegraph, (23/8/13)
UK rallying faster than thought as exports leap boosts GDP Independent, Russell Lynch and Ben Chu (24/8/13)
UK economy expanding faster than first thought, GDP revision shows Guardian, Heather Stewart (23/8/13)
Growth upgrade points to ‘sustainable’ recovery Telegraph, Philip Aldrick (23/8/13)

Previous articles
UK wages decline among worst in Europe BBC News, (11/8/13)
Squeezing the hourglass The Economist, (10/8/13)
UK first-quarter growth unchanged BBC News, (28/5/13)
Summer heatwave triggers shopping spree in ‘Wongaland’ economy Telegraph, Steve Hawkes and Steven Swinford (15/8/13)
Retail sales data better than expected as UK economy enjoys summer bounce Guardian, Heather Stewart (15/8/13)
Mark Carney is banking on you to keep spending Telegraph, Philip Aldrick (10/8/13)
NIESR upgrades UK economy but warns on consumer spending Telegraph, Philip Aldrick (2/8/13)
Consumers ‘expect better economy’ Belfast Telegraph, (4/8/13)


  1. Explain what you understand by a ‘sustainable’ economic recovery.
  2. What are the expenditure components that make up Aggregate Demand?
  3. Explain what you understand by consumption smoothing.
  4. Why would we would typically expect consumption growth to be less variable than that in disposable income?
  5. Would we expect consumption growth to always be less variable than that in disposable income? Explain your answer.
  6. What impact do you think the financial crisis has had on consumer behaviour?
  7. To what extent do you think the current growth in consumer spending is sustainable?
  8. How important are expectations in determining consumer behaviour?