UK GDP slumped by 2.2 per cent in a coronavirus-ravaged first quarter of 2020, its worst slump since 1979, data confirmed today.
The figure was slightly higher than the Office for National Statistics’ (ONS) initial estimate of the pandemic hit. It initially measured a two per cent fall.
The drop revealed today is the worst fall in UK GDP on record since a matching 2.2 per cent fall in 1979.
Some economists estimated it was the deepest slump in GDP in over a century.
Households saved rather than spent more of their disposable income in the first quarter than at any time in the last three years, at 8.6 per cent, the ONS data revealed.
That was primarily due to a UK-wide lockdown that kicked in on 23 March. That saw all shops shut save for supermarkets, off-licences, pharmacies and a handful of others.
Household consumption declined by 2.9 per cent in the first quarter of 2020 in Quarter 1 2020, a significant 1.2 percentage points worse than first feared.
Services sector shrinks at record pace
The UK’s services sector sank by a record 2.3 per cent while construction output fell 1.7 per cent to knock GDP. Manufacturing failed to offset the contraction as it shrank 1.1 per cent over the quarter.
In the UK’s services industry, computer programming saw an increase in demand. But vehicle repair garages, wholesale and retail trade, food and drink, hotel and travel firms all saw output fall.
EY Item Club’s chief economic adviser, Howard Archer, said: “On the output side of the economy, there was widespread contraction in the first quarter.
“The first quarter contraction in GDP was almost entirely due to economic activity being increasingly affected by coronavirus restrictions, culminating in the lockdown.
“[UK] GDP had been lacklustre at the start of 2020 in any case, despite increased consumer and business confidence after December’s election, edging down 0.2 per cent month-on-month in February after a rise of 0.1 per cent in January.”
Monthly data already shows UK GDP fell 5.8 per cent in March before plunging in April.
And while the government’s furlough scheme limited loss of income, with the Treasury stepping in to pay 80 per cent of wages for millions of workers, it is not clear how quickly the economy will recover.
Severe damage came to the economy in the second quarter of 2020. April saw UK GDP shrink by over 20 per cent while jobless claims rocketed.
That has left Brits worried about the state of the economy, harming consumer confidence.
The ONS data comes as Prime Minister Boris Johnson prepares to outline steps to lift UK GDP from its knees.
He is set to pledge to “build, build, build”, committing £5bn to invest in roads, schools and hospitals.
Britain’s current account deficit widened by more than expected in the first three months of 2020, ONS data also showed on Tuesday.
The Office for National Statistics said the balance of payments deficit – a long-standing concern for investors because it leaves Britain reliant on foreign inflows of cash – grew to £21.1bn in the first quarter.
That compares with a median forecast of £15.4bn in a Reuters poll of economists.
When will UK GDP recover?
Thomas Pugh, UK economist at Capital Economics, warned April’s massive fall means the second quarter may be worse than the first quarter’s drop.
That could weigh on the economy’s recovery.
“The 20.4 per cent month-on-month fall in GDP in April means that Q2 is guaranteed to be worse than Q1,” he said.
“Admittedly, the surveys suggest that output recovered more quickly than we had previously expected in May and June and that the risks to our Q2 GDP forecast of a 23 per cent fall are firmly weighted to the upside. But it will still take the economy until 2022 before it regains its pre-crisis level.”
The most recent flash economic survey suggested the UK economy will bounce back to growth in the third quarter after better-than-expected industry recoveries.
And Archer agreed, saying UK GDP should grow 10 per cent quarter on quarter from June to September if lockdowns keep easing.
Archer also pointed to another £100bn of Bank of England quantitative easing, despite a slowing rate of bond purchases.
“The substantial fiscal and monetary stimulus that has been enacted should provide ongoing support to the economy,” he said. “While some of the emergency fiscal measures will wind down over the coming months – such as the jobs retention scheme ending in October – the chancellor is expected to soon announce further near-term stimulus measures.
“There should also be some pent-up demand following the reduction in consumer spending in the second quarter due to the lockdown. Global economic activity should also improve in the latter months of 2020 as other economies recover from the impact of coronavirus.”
But he warned job losses will weigh on the UK economy’s recovery.
“Consequently, despite the economy’s expected return to growth in the third quarter and then continuing its recovery in Q4, the EY Item Club still expects GDP to contract by eight per cent over 2020.”
More to follow.