Britain suffered a record decline in economic output in the second quarter of this year, suffering a contraction of almost 20 per cent when lockdown measures were at their peak, according to new government data.
Gross domestic product fell 19.8 per cent in the three months to June, compared with the previous quarterly decline of 2.5 per cent – the biggest drop since Office for National Statistics data began in 1955 and the largest contraction for any major advanced economy.
“The Quarterly National Accounts showed that the bulk of the pain of Q2’s slump in GDP was borne by the government rather than households and businesses. But with the recovery already flattening off, fiscal support fading and the full scale of the fallout in unemployment yet to be felt, that will change in the second half of 2020,” said Ruth Gregory, a senior UK economist at Capital Economics.
Britain's economy has shrunk by about a fifth in the first half of this year, far bigger than any previous contraction on record, according to the ONS. The British government borrowed a record £35.9 billion ($46.01bn) in August - £30.5bn more than the government borrowed in the same month last year – as it tried to bolster the economy amid the crisis, with fears the deficit could hit £372bn by the end of the tax year.
Last week, chancellor of the exchequer Rishi Sunak set out the government's new support scheme to save millions of jobs and businesses from a winter crisis as the number of new Covid-19 cases soared to new highs. The new jobs initiative will replace the existing furlough scheme, which has cost the government £39.3bn as of September 20.
The UK economy saw record quarterly falls in sectors that were most exposed to government restrictions, with services output contracting 19.2 per cent, production output falling 16.3 per cent and construction output decreasing 35.7 per cent.
While the second quarter saw a record drop in household consumption of 23.6 per cent, real household disposable income fell by 2.3 per cent quarter-on-quarter, when adjusted for inflation, as government wage subsidies for furloughed workers meant many British households experienced only a small salary hit.
As a result, households ended up saving 29.1 per cent of their income as shutdown measures restricted the ability to spend in shops, restaurants and on public transport. The amount saved rose to almost £104bn, triple that in the previous quarter.
On the corporate side, the profits of non-financial businesses sank by 9.6 per cent quarter-on-quarter, "far smaller than it would have been if the government had not taken the responsibility for paying the wages of furloughed employees and deferred some scheduled tax payments" said Ms Gregory. “But with fiscal support easing and unemployment rising, the government is now handing back the burden to households and businesses.”
While indicators that cash involuntarily built up during the lockdown helped drive a strong recovery in the third quarter, how quickly the economy continues to grow will depend on whether consumers maintain their spending or insist on holding precautionary savings as the economic outlook darkens.
Unemployment is set to soar as wage support is scaled back, after hitting 4.1 per cent in the second quarter of the year. Analysts expect jobless rates to peak at 8.9 per cent in the fourth quarter, before dropping back again in 2021 as the UK economy recovers from the crisis.
However, with movement curbs being re-imposed amid a resurgence of coronavirus cases, and the risk of a disruptive Brexit growing amid troubled trade talks between Britain and the European Union, the economic picture may deteriorate further.
“What matters the most is … how will the economy face the fresh challenges of new restrictive measures,” said Naeem Aslam, chief market strategist at London’s Avatrade.