The latest GDP figures from the Office for National Statistics (ONS) showed that the economy contracted by 20.4% in the second quarter of 2020, compared with the first quarter.
Economy Contracted
The economy contracted by 20.4% overall in the second quarter of 2020. This represents the largest quarterly fall on record (such records beginning in 1955), and given that it is the second consecutive quarterly fall in GDP, the UK is now officially in recession. Over the first half of 2020, the economy contracted by 22.1%
Whilst the second quarter statistics are grim, the bulk of the contraction took place in April 2020, when the lockdown was at its tightest. GDP fell by 20.0% in April 2020 (revised down from 20.4%), then increased by 2.4% in May 2020 (revised up from 1.8%), and increased again by 8.7% in June 2020. Overall, therefore, GDP is 17.2% down on its pre-COVID-19 level. Hence, the fact that GDP rebounded during the last 2 months of the second quarter indicates that a continued recovery in GDP is likely to take place in the second half of the year. Indeed, the Governor of the Bank of England, Andrew Bailey, stated recently that in his view the economic slump caused by the coronavirus was likely to be less severe than anticipated, with GDP contracting by 9.5% overall in 2020, with GDP growth of 9% in 2021, and 3.5% in 2022
The ONS also found that:
- The UK has been hit the hardest of the G7 economies, due to its greater reliance upon services compared with the other 6 economies, and because it locked down later
- Services output contracted by 19.9% during the period April 2020 -June 2020, whilst production fell by 16.9% and construction by 35.0% during the same quarter. Most of the decline occurred during April 2020, the first full month of the coronavirus lockdown, and the month during which the lockdown was at its tightest. During that month, services output fell by 19.0%, production by 20.3%, and construction by an astonishing 40.1%.
- Whilst consumer spending fell by 18% in April 2020, over the last 3 months it has practically returned to pre-COVID-19 levels, with an increase in retail spending in June 2020 of 13.9%, and a further increase of 3.2% in July 2020. Moreover, whilst a report from Growth for Knowledge found that consumer confidence had plummeted to -34% during the final 2 weeks of March 2020, the largest fall since records began in January 1974, by the 24th July 2020, the index had recovered to -27%.
- Alongside the record fall in GDP, the number of workers on payroll fell by 730,000 between March 2020 and July 2020. The number of people seeking unemployment related benefits (known as the claimant count) increased to 2.7 million in July 2020, an increase of 116.8% compared with March 2020. The number of people in employment in the UK fell from 32.99 million in April 2020, to 32.92 million in June 2020, with unemployment falling from 1.35 million in May 2020, to 1.34 million in June 2020. The Bank of England forecast that unemployment will reach 2.5 million by the end of 2020, driven largely by the ending of the coronavirus job retention scheme.
Reaction
The Chancellor of the Exchequer, Rishi Sunak, whilst acknowledging the fact that the economy contracted in the second quarter, believes that the economy is on course for recovery given the GDP growth during the 2 final months of the second quarter. He stated: "What we do know is that there are promising signs.....There’s still work to do and even as we recover many people are going to lose their jobs, already have lost their jobs, and we need to make sure that we are constantly focused on providing new opportunities for those people.”
Economist, Julian Jessop, added: "The real “news” in today’s official GDP data is not that UK economy shrank for a second successive quarter in the three months to June, thus meeting the usual definition of a “recession”. That was a racing certainty anyway, given the collapse in economic activity in April and the limited recovery in the monthly data for May, which had already been reported.....Indeed, as well as being “old” news, this is not necessarily even “bad” news. The slump was the result of the government’s decision to shut down large parts of the economy and to discourage many people from doing what they would normally be doing in order to save lives. It certainly seems odd for people who have been calling for even tighter restrictions to express dismay at the impact on GDP. Frankly, this is what they wanted. The real news today – the piece of the jigsaw that was still missing – was the monthly data for June itself. These confirmed that the recovery that began in May accelerated in June, with GDP rising by 8.7% in the final month of the quarter.....Of course, there is still plenty for the pessimists to pick on. For a start, GDP is still more than 17% below its level in January, before the pandemic struck. But these particular data only take us to the end of June, when the recovery was going through its earliest stages. The latest business surveys and other timelier indicators suggest that the economy has continued to pick up since then. Others have focused on the likelihood that the UK will be at the bottom of the league for growth in the second quarter....However, the UK’s relatively poor showing in the second quarter is mainly because other countries began their official lockdowns earlier, and so took a bigger hit to growth in the first quarter instead. If you combine the data for these two quarters, the fall in UK GDP was much closer to that experienced by France or Italy, and actually slightly smaller than that of Spain. Admittedly, that’s not much to cheer. But the flipside is that the UK should leap towards the top of the table in the third quarter and beyond....In summary, April was dreadful, but the real message from today’s GDP data is that the economy is already rebounding. The recovery should therefore still look as much like a “V” as the gradual lifting of the emergency measures allows, despite the prospect of a painful bump in unemployment in the meantime."
