Friday 12 June 2020 8:10 am

UK economy shrinks 20 per cent in April lockdown in worst ever month

The UK economy shrank by a record 20 per cent in the first full month of lockdown as shops sent workers home to close for the duration of April.

Activity in the UK economy contracted by 20.4 per cent in April, the Office for National Statistics (ONS) said today, marking the single largest monthly drop since records began in 1997.

The second largest fall was for March, when GDP fell a massive 5.8 per cent.

But a three-month measure up to April shows the UK economy shrank 10.4 per cent. That leaves the UK primed to post one of its worst quarters ever.

Most shops remained closed in May, but construction workers returned to work. That means last month’s figures should show an improvement after Prime Minister Boris Johnson sent the country into lockdown on 23 March.

Today’s figures are worse than predictions, with Pantheon Macroeconomics’ consensus of estimates pointing to an 18.7 per cent plunge.

Johnson launched the lockdown to curb the spread of coronavirus as Covid-19 raced through the UK population. So far more than 40,000 people have died in the UK, according to an official death toll. However, the true number could be much higher.

Jonathan Athow, deputy national statistician for economic statistics, said: “April’s fall in GDP is the biggest the UK has ever seen, more than three times larger than last month. [It was] almost 10 times larger than the steepest pre-Covid-19 fall.”

That meant the UK economy was 25 per cent smaller than it was in February.

“Virtually all areas of the economy were hit, with pubs, education, health and car sales all giving the biggest contributions to this historic fall,” Athow added.

“Manufacturing and construction also saw significant falls, with manufacture of cars and housebuilding particularly badly affected.”

Trade also suffered badly, with deep falls in imports and exports of cars, fuel, artwork and clothing.

Services shrank by 9.9 per cent, industrial production dropped 9.5 per cent, and construction tumbled 18.2 per cent.

Read more: UK house prices gauge hits 10-year low – but signs of confidence ahead

UK economy hit could scar Britain for years

The ONS data followed hot on the heels of a dire OECD prediction stating the UK faces the worst economic hit from the first wave of coronavirus infections.

The group predicted the UK faces a contraction of between 11.5 per cent and 14 per cent in 2020. That depends on whether or not a second wave of infections occurs.

Read more: OECD: UK economy to take world’s biggest hit from Covid-19

Tej Parikh, chief economist at the Institute of Directors, warned “the economic turmoil caused by coronavirus is unparalleled”. He added that it could “scar” the UK economy for some time.

“Emergency loan schemes have helped stop firms collapsing, but left many saddled with debt,” he added.

“Businesses will be reluctant to hire and spend on new projects as they repair their finances, particularly as social distancing eats into demand and productivity. Firms will continue to face cashflow challenges in the months ahead.

“Having provided businesses life support, the government must now figure out how to stimulate activity. As the furlough scheme winds down, further job losses could be on the cards without additional support for firms’ costs.”

The ONS’ UK economy statistics for April came as several firms announced mass redundancy rounds this week. British Gas owner Centrica said it will cut 5,000 jobs and Johnson & Matthey eyed 2,500 jobs.

Read more: British Gas owner Centrica to cut 5,000 jobs

Mariano Mamertino, senior EMEA economist at Linkedin, called today’s figures “unnerving”. And he warned of years of high unemployment.

“Rising unemployment can bring an adverse effect on consumer confidence and spending power,” he added. “It will take years for employment numbers to recover. This is likely to continue to have a drag on GDP figures.”

Should PM extend Brexit trade talks after woeful stats?

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Jeremy Thomson-Cook, chief economist at financial services firm Equals, said the record decline was down to the lockdown’s shut shops and furloughed workers.

“The 20 per cent fall is a shocking figure none the less,” he said. “But it gives us a good idea of how deep the trough is that the UK economy needs to make its way out of.”

He also called for a Brexit transition period extension beyond the end of 2020. Boris Johnson and EU Commission president Ursula Von Der Leyen are set to meet for crunch talks shortly. But markets fear there is little time to negotiate a deal.

“We can but hope that today’s numbers focus a few minds in to providing an extension to the current transition period so as to relieve businesses from fighting two of their largest ever battles concurrently,” Thomson-Cook added.

UK economy ‘past the worst’ but faces slow recovery

With some gradual reopening occurring in May, as construction workers returned to building sites, economists said April would be the UK economy’s worst point.

“We are past the worst,” said Capital Economics’ chief UK economist, Andrew Wishart. “But the recovery will be a drawn-out affair as restrictions are only lifted gradually and businesses and consumers continue to exercise caution.”

And he warned the fiscal cost of measures to support the UK economy, plus an expected surge in unemployment, will hurt recovery.

With a 25 per cent fall in GDP at April’s worst moments, Wishart warned the coronavirus recession is “by far” the worst on record.

The financial crisis and Great Depression both produced seven per cent hits to GDP. But the UK economy has collapsed under the weight of shuttered shops and furloughed staff.

“Having plumbed those unprecedented depths, the economy is now on the return leg. But the recovery will be a far more drawn out affair than the collapse,” Wishart said.

No V-shaped recovery ahead

The British Chambers of Commerce also warned of a slow recovery. Its head of economics, Suren Thiru, said a V-shaped recovery remains unlikely. He warned it cannot happen “with many sectors continuing to operate at reduced capacity”.

“With a monthly fall in UK GDP over thirty times the average month on month decline during the global financial crisis, the economic impact of Coronavirus has been put into sharp relief.

“Some firms, including those in our hospitality, leisure and tourism industries, may remain closed for some time,” he added. “[They] will require flexible and open-ended government support to weather the economic storm.”

“Over the coming months, further action will be needed to limit the long-term economic damage and kickstart a recovery,” he added. He called for government to “close gaps” in support and take steps to stimulate consumer demand and business investment.

“Establishing air bridges between countries with low infection rates would provide a much-needed boost to key parts of the UK economy,” Thiru added.

More to follow.