UK’s virus-stricken economy shrinks 5.8% in March as lockdown continues

Services and construction sectors 'saw record declines' as the enforcement of restrictions began

The UK is facing a sharp economic contraction due to a lockdown in place to fight the coronavirus. Bloomberg

Gross domestic product in the UK suffered a record monthly fall in March, dropping 5.8 per cent month-on-month as the impact of lockdown measures put in place to stop the spread of the coronavirus kicked in.

The economy shrank 2 per cent over the course of the first quarter, with almost all sectors reporting declines, according to the Office for National Statistics. The accommodation and food services sector was particularly hard hit, dropping 9.5 per cent over the three-month period.

“With the arrival of the pandemic nearly every aspect of the economy was hit in March, dragging growth to a record monthly fall,” said Jonathan Athow, the ONS’s deputy national statistician for Economic Statistics.

“Services and construction saw record declines on the month with education, car sales and restaurants all falling substantially,” Mr Athow said, adding that global trade was also affected with both imports and exports declining. The balance of payments gap narrowed as imports fell by £13.3 billion (Dh59.96bn), but exports dropped by £12bn.

The UK has rolled out monetary and fiscal measures aimed at softening the blow caused by measures taken to stem the spread of the pandemic, with the Bank of England cutting interest rates to 0.1 per cent and embarking on an asset purchase programme that is on track to buy £645bn worth of treasury and corporate bonds by July.

The government has also pledged to guarantee lending to small and medium-sized businesses and on Tuesday announced it would extend a scheme to pay up to 80 per cent of furloughed workers’ wages to a value of £2,500 per month until October.

However, despite these measures the Bank of England is forecasting a 25 per cent quarterly decline in GDP for the three months to June.

“The UK economy was hit hard by the necessary shutdown at the end of March, and recent data suggests the full impact of that difficult decision is still yet to come,” said Rain Newton-Smith, chief economist for the Confederation of British Industry - a trade body representing larger companies.

“The range of financial support for businesses and workers provided by the government has been a lifeline for many firms so far. These schemes are critical in keeping companies afloat and they will need to adapt as the economy restarts,” Ms Newton-Smith added.

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The FTSE 100 index traded 1.4 per cent lower by 1.33pm UAE time, but the pound was trading up 0.23 per cent against the dollar at $1.2288.

Currency traders are more focused on “forward-looking factors such as the prime minister’s three-stage plan to open the economy”, said Naeem Aslam, chief markets analyst at Avatrade.

“What is important to keep in mind is that today’s GDP number isn’t the true reflection of the economy because it has captured only nine days of the national lockdown,” Mr Aslam said.

Jasper Lawler, head of research at London Capital Group, said: "The current quarter is where the real concern lies.

"Confusion over the UK’s exit from lockdown matters more than a record contraction in March."