UK economy plunges into worst-ever recession after record 20.4% contraction

The second quarter slump is greater than the contractions of Spain - and even the US

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The UK slipped into its first recession since 2009 posting a record 20.4 per cent contraction in the second quarter that made it the worst-performing European economy.

The slump follows a 2.2 per cent drop in the first three months of 2020, raising more questions about the British government’s handling of the Covid-19 pandemic.

The drop in the UK economy, the largest decline since quarterly records began, is greater than the 18.5 per cent second quarter contraction reported by Spain. The US economy shrank 9.5 per cent during the same period.

“The GDP number for the UK’s economy was nothing surprising as many traders were expecting the UK GDP to print a horrible number because the entire economy came to halt due to coronavirus,” Naeem Aslam, chief market analyst at Avatrade in London, said on Wednesday.

As the government eases restrictions on businesses, signs of a recovery are emerging, with the monthly gross domestic product rising 8.7 per cent in June. This, however, is 17.2 per cent below February 2020 levels, according to the Office for National Statistics (ONS).

Economic output in April registered record declines in the three main indicators: services, manufacturing and construction. Despite growth in May and June, all three remained significantly lower than in February, according to government data.

The output of service industries remained 17.6 per cent below the level of February 2020, production industries stayed 11.6 per cent lower, manufacturing remained 14.2 per cent below that level. The construction industry remained 24.8 per cent under its February level, despite a rise of 23.5 per cent in the June, data showed.

UK government facing criticism

The government has been criticised for acting later than its European counterparts in implementing lockdowns. It subsequently failed in stemming the spread of the virus and is paying a hefty human and economic cost. The UK has the highest number of Covid-19 fatalities in Europe.

Although the government has gradually opened up the economy, lockdowns in parts of the country are still in place to curb local infections, stoking fears it could derail the recovery process.

The International Monetary Fund projects the UK economy to shrink 10.2 per cent for the whole of 2020, followed by an estimated expansion of 6.3 per cent next year. The UK government, which rolled out several fiscal and monetary packages is phasing out some of the support measures such as the wage support scheme. The government is paying the wages for about 10 million people put on furlough programmes.

Capital Economics said the UK recovery has "been underwhelming ... and the unwinding of the furlough scheme from August is likely to prompt a second wave of unemployment."

It gave this summary in a tweet sent out on Wednesday:

There were record contractions in private consumption, government consumption and gross capital formation, as well as large declines in gross trade flows in the second quarter, according to the statistics office.

Private consumption alone accounted for more than 70 per cent of the decline in GDP in the second quarter.

“Hospitality was worst hit, with productivity in that industry falling by three quarters in recent months,” the ONS said.

Government spending declined 14 per cent during the second quarter, while consumer spending during the period slumped 23.1 per cent.

“Amid all the record-breaking speed of the UK’s economic decline, one number stands out – the collapse in consumer spending," Karim Yousfi, chief global strategist at Audacity Capital, said.

"With retail sales volumes falling by just shy of a tenth during the same period, the chances of Britons spending their way out of what is now officially a recession look slim."

Uncertainty set to dampen recovery

Looking ahead, additional uncertainty around Brexit will dampen business investment further, regardless of whether there is an eventual deal or not, Capital Economics said.

"As a result, the UK’s recovery from the coronavirus crisis will probably be slower than the recoveries in the US and the euro-zone," it said.

"We expect fiscal policy to remain loose and monetary policy to be eased further," Capital Economics added. "We suspect the Bank of England will expand its quantitative easing programme by a further £250 billion (Dh1.2 trillion) over the next year and keep interest rates at or below 0.10 per cent for five years."