Normally these things carry on uninterrupted during recessions: output of public services is in general less volatile than private-sector output (Chart 3). But on this occasion, sweeping all before it, the pandemic curtailed many of these more standard activities, even after the full lockdown was ended in the summer. In the third quarter of this year, for example, real healthcare output – as estimated by the ONS – was still more than 20% lower than in 2019Q3. Taken together, measured declines in measured health and education output accounted for a quarter of the near-9% drop in aggregate GDP during the course of that year. Note that there’s been no decline in nominal spending on public services, or the collective incomes of people who work in them. Employment in public services has continued to rise and so have average wages. It’s just that, at least as measured in the national accounts, productivity in that sector has declined and the implicit price of those services – the so-called “deflator” – has risen. The result is an additional wedge, relative to any normal downturn, between (measured) real GDP and household incomes. Chart 3: Drop in GDP partly reflects a steep fall  Chart 4: Households protected from fall in  in measured output of public services. This has  national income  no impact on household incomes  Sources: ONS and Bank calculations. Sources: ONS and Bank calculations.
But this divergence in demand may help to explain why, at least on impact, the pandemic has depressed inflation by a bit less than we and others anticipated when it began. Various things have contributed to gap between real GDP and retail spending Expenditure switching certainly isn’t the only reason for the contrast in Chart 1. I want first to run through a number of other things that have probably contributed to it. One is the weakness of spending – on durables in particular – during the lockdown in the spring. At that time there were many things people were simply unable to buy. For durable stuff, much of that spending is likely to have been delayed rather than cancelled. If you needed a new fridge or a new car in March, you presumably still needed one in June, when the lockdown began to be eased. One would’ve expected most of that catch-up to occur during the summer but some of it may also have leaked into the autumn and early winter. 4  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  4  Second, part of the drop in GDP reflects an unusually large decline in the measured real output of public services, something that has no consequences for people’s incomes or their ability to spend. To construct these estimates the Office for National Statistics uses detailed information on things like the numbers of pupils in school and operations in hospitals.