UK GDP Decline Worst in 12 Years, More Pain To Come

- GDP growth at slowest quarterly pace since Q4 2008

- Nearly all industries contributed to the decline

- Imports and exports fell over past two months

- 15-20pct contraction predicted for Q2

 

London, 13 May 2020 (LS NEWS) – The start of the Covid-19 crisis in March was enough to drag UK GDP growth into contraction territory at levels not seen since the global financial crisis of 2008.

 

The Office for National Statistics released data showing the UK economy fell by 2pct in the first quarter of 2020. Although less than the expected -2.5pct, experts expect the worst of the hit to activity to come in April following the government’s lockdown decree on 23 March.

 

The quarterly print was dragged down by the numbers from March, when the economy shrunk by 5.8pct month-on-month, the biggest monthly decline since the series began in 1997.

 

Despite the poor numbers, the government’s less draconian lockdown measures likely helped the economy fare better than countries such as France and Spain. James Smith, ING’s developed markets economist, wrote: “Admittedly the quarterly decline is less severe than we saw in other parts of Europe, where lockdowns kicked in earlier in March, and in some cases, measures were more stringent.”

 

Services bore the brunt

Services make up roughly 70pct of the UK’s economy, and the shuttering of restaurants, bars and offices hit the sector hard. The ONS noted that services fell by 1.9pct in the three months to March, with widespread falls across most industries. The most severe declines were seen in tourism and travel. Accommodation fell by 14.6pct as a result of the closure of hotels and campsites in March. Travel agents saw a 23.6pct decrease because of reduced demand caused by the introduction of travel restrictions.

Helping to limit the slide in services was 1.4pct growth in computer programming, consultancy, and related activities.

 

Production fell by 4.2pct in March, with manufacturing down by 4.6pct. The ONS said the largest cause of this drop was the manufacture of transport equipment, which plummeted 20.5pct following Covid 19-led shutdowns at car plants across the UK.

 

UK household consumption dropped 1.7pct, the largest contraction since the fourth quarter of 2008, alongside declines in gross fixed capital formation, government consumption and trade volumes. Staff furloughs and mass redundancies across the country has meant consumer demand fell off a cliff in March.

 

Trade takes a hit

Net trade was also a subtractor from GDP growth on the quarter. Including non-monetary gold and other precious metals, the total trade balance shrunk by GBP12.7 billion to a deficit of GBP4.8 billion in the first quarter.  Imports slid 5.3pct, however exports saw a decline of 10.8pct. The UK’s total trade deficit narrowed by GBP37.4 billion to GBP8.6 billion in the 12 months to March, the ONS.

 

Markets

Cable shortly rebounded to 1.2280 against the dollar on the fact that the poor data still bettered market expectations. However, gains did not hold and found sellers at 1.230. Money markets have now priced in negative rates by June 2021.

 

Adrian Lowcock, head of personal finance at investment platform Willis Owen, said: “This is the UK’s first ever self-inflicted economic contraction and is the largest fall since the financial crisis in 2008.

 

“Worse is still to come as this release only includes one full week of lockdown, but already the devastating impact of the virus and subsequent lockdown can be seen.

 

“While investors should expect the economic data to get worse in the coming months, the policy response has been so immense that there’s still hope the economy can recover swiftly.  Much depends on the progress of easing the lockdown whilst containing the virus.”

 

Forecasts are hard at this time, and many economists have struggled to get a handle on the severity of the downturn. EY Item Club has updated it estimates based on today’s publication. Howard Archer, chief economic advisor to the EY ITEM Club, said: “We now expect GDP contraction of 7.5pct in 2020, rather than 6.8pct.

 

“GDP is forecast to contract by around 15pct quarter-on-quarter in the second quarter rather than by some 13pct quarter-on-quarter. The first-quarter contraction of 2.0pct quarter-on-quarter was slightly more than the 1.8pct drop we had pencilled in, although it was below the consensus decline of 2.5pct (the Bank of England had estimated 3.0pct).

 

“Our second quarter forecast of around a 15pct quarter-on-quarter contraction assumes that, following the very modest easing of restrictions by the government on 11 May, further gradual easing occurs over the coming weeks.”

 

It should be noted that due to the impaired ability of the UK stats office to collate data while in lockdown, these initial figures will likely see some significant revisions in the weeks and months ahead.

 

Harry Daniels

Editor-in-Chief, LiveSquawk News

@ HarryDaniels71