Snapshot

Economics

Worse yet to come as UK growth slumps

The UK economy contracted by 2% in the first quarter of 2020 as lockdowns in response to the Covid-19 pandemic took their toll on activity. The preliminary estimate was less negative than consensus estimates, though it does represent the largest fall in GDP since the fourth quarter of 2009 and the Global Financial Crisis.

The monthly GDP release provides more insight as the national lockdown only commenced from 23 March. Real GDP fell 5.8% in March compared to -0.2% in February and +0.1% in January. Unsurprisingly, the construction sector was the most negatively impacted by lockdowns, falling 2.6% in March and over the first quarter.

Industrial production was down 2.1% in Q1, with the manufacturing sub-component falling 1.7%. Services, the largest sector grouping in the economy, contracted by 1.9% in March and over the first quarter. Accommodation and Food Services was the worst hit services sub-sector (-9.5% in March), followed by Transport and Storage (-4.9%) and Education (-4%).

The expenditure breakdown of GDP shows that net trade was the largest drag on the quarter, reducing GDP growth by 5.3 percentage points. The volume of exports fell by 10.8% while imports only fell by  5.3%. Household spending fell by 1.7% while investment fell by 1%, though business investment was flat over the quarter.

Interestingly, government consumption in real terms fell by 2.6%, as spending on healthcare and education were cited as significantly down. The Office for National Statistics (ONS) did mention that while healthcare activity related to the pandemic was up, wider use of healthcare, including planned operations, had fallen sharply.

More broadly, from the information available, we can estimate that between 18% and 20% of the economy was shut down over the period in question. This is less than the estimate of 35% which was put out by the Office for Budgetary Responsibility.

The ONS does warn that the quality of data is lower than normal given the lower response rate to its survey. Survival bias is a problem when collecting data during such crisis as non-respondents are treated as missing, rather than closed down, temporarily or otherwise.

As a comparison, France and Spain saw much larger declines in their GDP growth, with estimated shares of the economy impacted around the 30% mark (even taking into account the earlier entry into lockdown - see ECB fine tunes its support for banks as GDP collapses). We may yet see significant downward revisions to UK GDP in future releases.

Looking ahead, we expect to see a double digit decline in GDP for the second quarter, given the economy was in lockdown for all of April, and has only just started to re-open in the middle of May.

If the rate of infections and fatalities continues to fall, additional services should resume from June, paving the way for a wider re-opening of restaurants, bars etc. in July. However, this should be seen as a best possible case scenario as the risk of delays or even a second wave of infections pose a significant risk to the outlook.