Plunging population would threaten extent of GDP recovery - Capital Economics
UK Economics

Plunging population would threaten extent of GDP recovery

UK Economics Update
Written by Paul Dales
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The possible sharp fall in the population since the start of the pandemic may explain up to 1.8 percentage points of the underperformance of the UK economy last year relative to its peers and, more worryingly, may present a downside risk to our forecast that the UK will enjoy a complete recovery from the crisis.

  • The possible sharp fall in the population since the start of the pandemic may explain up to 1.8 percentage points of the underperformance of the UK economy last year relative to its peers and, more worryingly, may present a downside risk to our forecast that the UK will enjoy a complete recovery from the crisis.
  • Many factors probably explain why the COVID-19 crisis led to a 10.0% fall in UK real GDP in 2020 (the annual figure hides the 25% fall from the peak in February to the trough in April) but smaller falls of 3.5% in the US and 7.0% in the euro-zone. (See Chart 1.) They include the UK’s worse experience with the virus that led to more stringent and longer containment measures, the composition of the UK economy that meant shutting down the larger services sector led a bigger hit to total GDP and the different way the national statistics agencies counted and valued output of the education, health and government sectors. (See here.) But a blog by Michael O’Connor and Jonathan Portes implies that a decline in the UK’s population may have also played a role. (See here.)
  • The blog provides compelling evidence that the ONS’s assumption that the population continued to rise during the pandemic may be flawed and that the population may have actually declined by around 1.4 million in the year to Q3 2020 as people born outside of the UK returned home.
  • The ONS relies on the International Passenger Survey that usually takes place at UK airports to generate its migration and population estimates. But as the survey has not been conducted during the pandemic, the ONS has been left in the dark and assumed that the population continued to grow at pre-pandemic rates. However, the ONS’s separate Labour Force Survey found that the number of UK residents born overseas of working age has fallen by 750,000. As the ONS’s population estimate has not fallen, the ONS squares the circle by assuming that the number of residents born in the UK has risen by the same amount.
  • O’Connor and Portes point out such a rise in the number of UK residents born in the UK seems implausible. They suggest it is much more likely that the pandemic led many people from overseas to leave the UK and return home. That may be because the virus was less prevalent in their home country, because the pandemic worsened their economic prospects in the UK (they may have lost their job or been furloughed) or because of Brexit. After scaling up the results of the LFS survey to take into account those not of working age, the blog estimates that the total population may have fallen by 1.4 million. If so, then there are some big implications for employment, the path the economy has already taken and the one it may take next.
  • O’Connor and Portes estimate that such a fall in overseas residents could mean the number of employees has not risen by 200,000 since September 2019 as the LFS figures suggest, but may have fallen by 750,000. The number of employees may then be 950,000 lower than currently estimated and total employment may be 2.9% lower. That would bring the LFS count of the number of employees more into line with the HMRC data taken from company payrolls. (See Chart 2.) As a smaller population would also lower the working age population, the unemployment rate would be largely unchanged. But the lower employment level could reduce the level of real household incomes by about 2.5%.
  • 1.4 million is 2.1% of the total population and 750,000 is 1.8% of the working age population. At the most, then, this could explain 1.8 percentage points of the 10% decline in GDP in 2020. But in reality, most of those people may have left the UK because they lost their job or were furloughed. That means they wouldn’t have contributed much to output anyway, although they would still have spent money on living expenses. (Note that the population estimate is not used to calculate GDP in the same way it is used to calculate LFS employment, so GDP would be unchanged.)
  • The more important point is whether these people are around to work and spend after the pandemic. If they returned to the UK as the pandemic subsides and the economy recovers, then the supply capacity of the economy would be much the same as before the crisis. That would raise the chances of the economy making a complete recovery from the pandemic without any permanent hit to either the level or growth rate of GDP. However, if they stayed overseas and are not replaced by new migrants (either by choice of due to restrictions on freedom of movement after Brexit), then it would raise the chances that the economy doesn’t return to its pre-crisis trend. There’s no way of knowing what’s going to happen, but such a sharp fall in the population represents a downside risk to our fairly optimistic economic forecasts. (See here.)

Chart 1: Real GDP (%y/y)

Chart 2: Employment (Millions)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Paul Dales, Chief UK Economist, +44 (0)7939 609 818, paul.dales@capitaleconomics.com