Perspective

Slow exit from lockdown hits UK growth


The UK is suffering its deepest recession in modern times, caused by the lockdown needed to contain the coronavirus pandemic. There is now enough data available to gauge the scale of the economic damage done during the early stages of lockdown. It paints a grim picture.

Lockdown takes its toll

The latest monthly estimate shows that the UK economy shrank 20.4% in April – the first full month of lockdown. This followed a 5.8% fall in March (full UK lockdown came into force on 23 March). This means that economic activity has fallen by 25.1% since its peak in January 2020.

This fall in GDP is the steepest in modern times. Historic data from the Bank of England suggests it could be the deepest recession in almost 300 years.

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The sharp drop in output varied across different sectors. Within the services sector, accommodation & food services (i.e. hotels and restaurants) saw a drop of 88.1% in April. By contrast, financial & insurance activities declined just 5.4%.

April likely to be weakest month

April should prove to be the worst month for the UK economy during the crisis. On 10 May, prime minister Boris Johnston asked non-essential workers who cannot work from home, but who can safely return to work, to do so.

Google mobility data suggests that the fall in travel to work bottomed out in April. This supports our view that GDP in May could have returned to positive growth. However, many but not all non-essential retail stores in England only opened on 15 June, while most personal services will remain closed until 4 July. (Decisions on lockdown are made by the devolved authorities, and so announcements by the prime minister relate to England only. Non-essential shops in Scotland are due to re-open on 29 June).

The UK economy has re-opened much more slowly than other parts of Europe, and has been slower than we expected. Unfortunately, the UK has struggled to contain the virus. This is the main reason why we recently lowered our UK GDP growth forecast from -7.2% to -8.5% for 2020. We had assumed lockdown would last six weeks into the second quarter (i.e. to mid-May), which proved too optimistic.

As the economy slowly opens, we expect growth to recover sharply in the second half of this year. However, social distancing rules will limit capacity for many firms. For some, it will make trading unprofitable, or worse, physically impossible.

What is more, many companies that were forced to shut down have had to pay fixed costs (e.g. rent) for much longer than expected, even if they have been able to furlough their staff.

When will demand recover?

The government has made loans available to businesses, and even grants in some cases. But it could still take many years of trading for these debts to be repaid and for companies to return to profitability. That is, if demand returns to a sufficient level.

And demand could be hit as households are very likely to want to build up a safety buffer in the form of savings. The UK had one of the lowest household savings rates in Europe going into the crisis, which will have left many families desperately short of funds. For individual households, saving more and spending less would be prudent, but it would come at the cost of lower UK economic growth.

The slower the re-opening of the economy, the greater the negative impact will be from these factors. We forecast a rebound in GDP growth in 2021 of 6% but this does not take the level of economic activity back to the pre-lockdown level.

The chart below shows our quarterly growth forecasts (bold line) compared to other professional forecasts.

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Apart from one organisation, the remaining forecasters agree that the level of GDP will not rebound back to its previous level by the end of 2021. Our forecast is slightly below the consensus for 2021 GDP growth.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.