UK GDP: Tough recovery awaits

Shutdown

As expected by many, the collapse in the UK’s economic output in the second quarter of this year was a number for the record books. The previous modern-day decline is a mere pin prick – 2.7% in 1974, when literally the lights went out during the three-day week after the oil crisis– compared to the 20.4% fall recorded this time. Unsurprisingly, the overall slowdown in activity beats the Eurozone, the US and is double the contraction seen in Germany through the first half of the year.

There are a number of simple reasons for this which include the fact that the UK went into lockdown a week after most European countries, and then began its reopening several weeks later. This has meant that the drop in output is more concentrated in the second quarter figures than any other quarter, while the UK’s service-based economy is more vulnerable to people being forced to stay at home. This corresponds with the fact that every sector contracted with the bulk of the drop led by private consumption which accounted for nearly two-thirds of the fall in quarterly GDP.

Light at the end of the tunnel?

It is the speed and strength of the recovery that is now key for the UK and at least the monthly figures for June signalled a decent rebound in growth. Activity grew by 8.7%, a vast improvement from May’s 1.8% growth and above the 8% expected, as factories ramped up production and shops reopened. The latter provided a fair chunk of the rebound as retail sales are now essentially back to where they were before lockdown. Similarly, July’s figures should see another bounce and due to those timing issues, will probably mean the UK’s third quarter figures appear larger than many other economies – cue more sensational headlines!

That this overall figure still remains a sixth below its level in February before the virus stuck is obviously a major concern and analysts forecast that the size of the economy may still be some 10% smaller at the end of the next quarter when compared to before the virus struck.

Autumn issues

Most probably, more testing times are still to come in the months ahead when local lockdowns potentially have an impact, there are no more ‘lockdown releases’ to boost the economy and the furlough scheme is wound down in October – over to you Chancellor Rishi. The latter data especially will be a focus as the latest jobs figures this week are not yet reflecting the Bank of England’s expectations of a 7%+ unemployment rate. Prolonged social distancing constraints and deep consumer uncertainty will not help the worst-hit sectors like hospitality and tourism, no matter how much of a short-lived boost these areas of the economy get from Government schemes that will expire at some point in the next few months.

Added to this is the inevitable issue around the Brexit transition period where firms will be hit with new additional costs to bear, even if a trade deal is agreed. That drag on the economy coupled with a global slowdown will likely prolong Britain’s under-performance in the second half of the year. The market’s attention will now turn to Monday’s trade talks where a no-deal scenario may rear its head once more.