UK economy shrinks at fastest pace since financial crisis

UK economy shrinks at fastest pace since financial crisis


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The UK economy shrank at the fastest pace since 2008 in the first three months of the year as coronavirus forced the country into lockdown.

The Office for National Statistics said the economy contracted by 2% in the three months to March, following zero growth in the final quarter of 2019.

The decline was driven by a record fall in March, and reflects just one full week of lockdown.

Analysts expect a bigger economic slump in the current quarter.

This is the first official growth estimate since the government introduced social distancing measures at the end of March.

Ruth Gregory, senior UK economist at Capital Economics, said the figures showed the UK economy was “already in freefall within two weeks of the lockdown going into effect”.

She added: “With the restrictions in place until mid-May and then only lifted very slightly, April will be far worse.”

While analysts expected a larger quarterly decline of 2.6% in the first three months of the year, it still represents the biggest contraction since the end of 2008, when Lehman Brothers collapsed.

The ONS said there had been “widespread” declines across the services, manufacturing and construction sectors.

This includes a record 1.9% fall in services output, which includes retailers, travel agents and hotels.

It added: “This is the largest quarterly contraction since the global financial crisis and reflects the imposing of public health restrictions and voluntary social distancing put in place in response to the Covid-19 pandemic”.

Opening up

The figures come as some of the lockdown restrictions are starting to be eased. Some employees in England who cannot work from home are now being encouraged to return to their workplaces.

Sectors “allowed to be open, should be open”, the government says. These include food production, construction and manufacturing.

In other developments, estate agents in England can now reopen, viewings can take place and removal firms and conveyancers can re-start operations, so long as social-distancing and workplace safety rules are followed.

On Tuesday, Chancellor Rishi Sunak announced an extension of the furlough scheme subsidising wages to the end of October.

While the scheme was “expensive”, he told the BBC that the cost to society of not doing it would be “far higher”.

France and Italy saw much bigger contractions of 5.8% and 4.7% respectively in the first quarter, where lockdowns were imposed up to two weeks earlier.

However, analysts expect a double-digit drop in UK gross domestic product (GDP) in the coming quarter.

The Bank of England has warned that the UK economy is likely to suffer its sharpest recession on record this year, even if the lockdown is completely lifted by the end of September.

While the Bank said the economy could shrink by 14% in 2020, it expects the downturn to be short and sharp, with growth of 15% predicted in 2021.

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The decline is also expected to be less prolonged than during the financial crisis, when the economy shrank for five consecutive quarters.

It also took five years to get back to the size it was before the meltdown.

The Bank of England expects the UK economy to rebound more quickly this time, returning to its pre-crisis size within two years.

The Chancellor has acknowledged to me it was “very likely” the UK is already in the middle of a significant recession after the publication of first quarter GDP figures showing one of the sharpest declines on record for the UK economy.

He said the -2% number was “not a surprise” and “in common with pretty much every economy around the world, we’re facing a severe impact from the coronavirus impact” and the numbers underlined why the Government had taken “unprecedented action” to support jobs, incomes and livelihoods” at a time of severe disruption.

On the reality that the UK has been in recession for four months he said: “Well, as you know, recession is defined technically as two quarters of decline in GDP. We’ve seen one here with only a few days of impact from the virus, so it is now, yes, very likely that the UK economy will face a significant recession this year, and we’re already in the middle of that as we speak.”

Asked about the leak to the Telegraph of an internal Treasury options paper which contained dire numbers for the UK deficit, and a view that a rapid “V-shaped” recovery was “optimistic”, the Chancellor said that it was “too early to speculate”

However, he added: “What we do know is in order to make sure that recovery as swift and as strong as we will like it to be, we need to take action now to protect people’s jobs and support businesses through this time.”

The reason why the number for the first three months matters is that it shows how devastating even a week or two of shutdown can be.

It means that April’s month-long closure of large swathes of the economy is likely to have hit GDP by 20-25%. This first quarter fall is bad enough and is one of the worst five economic quarters since modern records began in 1955. But the current quarter will see a hit at least 10 times worse, and off any imaginable scale in living memory.

The much hoped for sharp bounce back, for example as contained in the Bank of England scenario last week, and the precise reason why so much rescue funding has flowed, is looking far from certain.


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