GBPCoronavirus

Grim UK GDP and more to come

May 13, 2020
We saw the impact of the pandemic on Britain’s economy this morning as data showed growth shrank by 2% in the first quarter and by a record margin in one month. The country was in lockdown for only a short time in that period, so it seems April and June will see a much steeper decline. How bad will it get as the UK struggles to define its lockdown exit strategy and the clock on Brexit talks ticks ever louder?

UK monthly GDP falls off a cliff

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The sharp contraction seen in today’s GDP data came as little surprise, as the economy shrank 5.8% in March, the largest drop since the monthly series began in 1997. The declines were felt in almost all sectors with the pandemic ending more than four years of uninterrupted growth in UK household spending.

The fall in the first quarter was in fact slightly better than estimates and less severe than the latest Bank of England forecasts. It was also less than the 3.8% slump suffered by the euro zone in the first three months of the year, though this reflects the later start of the UK lockdown measures.

It’s important to note that the lockdown was only in place for seven working days from January to March, although even then it resulted in the largest quarterly contraction since the peak of the GFC in 2008-9. This means more records will be broken after the next data release as the UK went into full lockdown mode. In fact, the Bank of England said last week that the contraction in the second quarter could approach 25% and lead to the largest annual decline in 300 years.

Baby steps out

Key going forward for the economy will be how the UK manages the three-step lockdown easing plan. After the delay to the country’s exit, the government has struggled to clearly articulate its strategy. But given that social distancing measures are here to stay for a while, many sectors will find it very challenging to return to profitability any time soon, with long-term investment plans also put on hold.

The BoE stated at last week’s meeting that the economy could rebound if coronavirus restrictions are lifted, forecasting a 15% recovery after a historic 14% fall in GDP for 2020 as a whole. However, this recovery might be slower if consumers proved more cautious.

Struggling sterling

The pound is the weakest major so far this month and the risks are piling up in a month that has historically been weak. Sterling has fallen every May over the past decade and all but four times since 2000. The slow and now rather vague response by PM Johnson’s government is concerning, MPC members have kept the door open for negative rates and the lack of progress in post-Brexit talks linger in the background, with the June deadline fast approaching. Remember that under the UK’s withdrawal agreement with the EU, both sides currently have until 31 December to ratify a trade deal and rules for future co-operation. Any extension to this December deadline has to be made by 1 July.

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