UK suffers worst recession on record

Output plunges 20.4% in Q2, the most since records began in 1955 and worse than any major economy so far

London

THE United Kingdom suffered more than any major European economy during the coronavirus lockdowns, piling pressure on the government to ensure the withdrawal of its support programmes doesn't derail the nascent recovery.

Output plunged 20.4 per cent in the second quarter, the most since records began in 1955 and worse than any major economy so far. It also pushed Britain into its first recession since 2009.

The report follows data that showed massive job loses since the start of the pandemic, and Chancellor of the Exchequer Rishi Sunak acknowledged that more pain is to come.

"I've said before that hard times were ahead, and today's figures confirm that hard times are here," he said following the release. "Hundreds of thousands of people have already lost their jobs, and sadly in the coming months many more will."

That casts a light on the risks of winding down government support for companies and workers too soon. Almost 10 million jobs have been put on furlough programmes under which the government pays the wages, and Mr Sunak insists the time has come to start phasing that out.

A rebound is under way - UK output jumped a record 8.7 per cent in June, beating forecasts - but high frequency data such as credit card spending and electricity use are still well below pre-pandemic levels. They've more or less recovered in other major European economies, according to Bloomberg Economics.

"The rapid growth rates seen for some sectors, such as hospitality, tell us more about the extent to which the lockdown damaged economic activity than it does about the prospects for a rapid recovery," according to James Smith, research director at the Resolution Foundation think tank. "With many firms unable to operate as normal, recovery will take time."

There are other worrying signs that the upturn could soon run out of steam.

Localised jumps in infections have heightened concerns over more shutdowns, government wage support is being phased out, and companies face higher tariffs should Britain fail to agree a trade deal with the European Union by the end of the year.

Economists and investors expect the Bank of England (BOE) to boost its monetary stimulus later this year by increasing bond purchases. The central bank has already pumped billions of pounds into the financial system and has cut its key interest rate to near zero.

UK government bonds signal continued pessimism toward prospects of a swift economic recovery. Yields on five-year debt, while rising, are still among the lowest points on the curve in a sign that the market still expects the BOE to ease further.

Adding to the sense of uncertainty, the Financial Times newspaper reported late on Tuesday that Mr Sunak is weighing options to shelve his autumn Budget if Britain is hit by a big second wave of coronavirus.

The latest figures add to evidence Britain is paying a heavy price for being slower than most of its peers to enter a lockdown in March. The country also has Europe's highest death toll from the coronavirus, and probably has the worst downturn of any major economy worldwide.

Wednesday's figures showed the damage in Q2 was widespread, with the construction industry alone seeing a 35 per cent contraction.

The report also showed:

  • Services, the biggest part of the economy, shrank 20 per cent and industrial production plunged 17 per cent.
  • Government spending fell 14 per cent, while business investment plunged 31.4 per cent, and consumer spending declined 23.1 per cent.
  • Productivity, as measured by output per hour, fell a record 2.5 per cent.
  • The peak to trough decline in GDP between February and April was 25.6 per cent.
  • Construction led June's rebound, while services increased a more modest 7.7 per cent.

The BOE has highlighted the labour market as a key concern, with officials fearing a jump in unemployment when government job support is withdrawn later this year. Data on Tuesday showed the number of employees on payrolls is already down around 730,000 compared with March.

The central bank warns that the longer the recovery takes, the greater the risk of economic "scarring". BLOOMBERG

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