This is a fast-moving issue and should be read as correct at the date of publication (12.06.20).
Economic output fell by one fifth during April when lockdown measures were at their most stringent. Although a severe decline was expected, the scale of the fall in GDP is unprecedented.
This Insight will set the April GDP figures in context.
GDP takes unprecedented plunge in April
GDP, the total value of all goods produced and services provided in the UK, was 20.4% lower in April compared to March. This is by far the biggest decline in the official monthly GDP data series, which is available from 1997. It is also very likely the largest fall in the post-Second World War era.
The first serious impact of coronavirus on the UK economy was evident in March. During March cases of Covid-19 spread rapidly. In response social distancing measures were introduced prior to the full lockdown on 23 March. If we compare April with February, as a rough measure of the impact of the virus outbreak, GDP fell by 25%.
This is over three times the 7% decline in GDP recorded during the financial crisis in 2008/09. In many respects this is not a surprise. During April some parts of the economy were shut down and people’s movements were severely limited.
Which sectors are most affected?
The declines were broad based, reaching across most of the economy, although some sectors were particularly hard hit.
The largest decline was in the accommodation and food sector, with output 92% lower in April compared with February. Output in the arts and entertainment sector dropped by 47%, while in construction it was 44% lower.
Global economy in deep recession
The UK is, of course, not alone in having shut down some of its economy as part of public health measures to combat the spread of Covid-19. The global economy is in recession. Many economies are facing similarly stark falls in GDP.
On 10 June, the OECD released its latest set of forecasts. It expects UK GDP to fall by 11.5% in 2020. This is very similar to its forecasts for the French, Italian and Spanish economies, but a deeper recession than that anticipated in Germany or the US. These projections assume that there isn’t a second wave of Covid-19 infections later in 2020.
The OECD is forecasting a relatively strong recovery in 2021. However, it has warned that most advanced economies would still be smaller by the end of next year than they were before the coronavirus outbreak. For the UK, the OECD projects GDP to be around 3% smaller at the end of 2021 compared with the end of 2019.
It shouldn’t be forgotten that forecasts for GDP growth are difficult even in benign conditions. They are exceptionally uncertain in the current environment (something the OECD and other forecasters readily acknowledge).
Modest improvement expected in May and June
Some relaxations on social distancing measures have now been implemented. We can expect to see UK GDP in May a little higher compared with April (though still well below pre-coronavirus levels).
Looking at some alternative indicators to the less-timely official data, we see more firms opening for trade, a modest increase in consumer spending and more people visiting retailers and using food outlets.
What is less clear is the speed of the recovery. Most non-essential retailers will be allowed to reopen on 15 June. Not all of these will reopen and those that do will have to implement new social distancing measures.
Meanwhile, restaurants remain take-away only for the time being. Most school age children won’t return to school until September. Many people flying into the UK are now subject to a two-week quarantine.
Speed of recovery is unclear
Economists expect economic activity to pick up noticeably in the second half of the year as social distancing measures are relaxed and more businesses reopen.
There will be pent up demand from some consumers who have been prevented from making certain purchases in recent months. For example, buying cars and houses.
This raises the possibility of a fast recovery. However, most economists don’t expect a ‘V’ shaped fast recovery. A slow return to pre-virus levels of economic activity seems more likely.
There are many risks to the outlook
There remain a number of risks to the economic outlook. Most prominently the possibility of further Covid-19 outbreaks. Even if the spread of the virus continues to decline, uncertainty remains high.
Consumers may be reluctant to return to ‘normal’ spending patterns. Higher unemployment levels are likely to have an ongoing impact. In addition, it is hard to predict how changes in behaviour caused by the pandemic might affect the economy.
As the Bank of England Governor Andrew Bailey said recently, “if there is any such thing as a normal recession … this one will be different”.
Coronavirus: Effect on the economy and public finances, House of Commons Library, 22 May 2020
Coronavirus: Impact on the labour market, House of Commons Library, 5 June 2020
UK economy: an interactive dashboard, containing latest key economic data, House of Commons Library
About the author: Daniel Harari is a researcher at the House of Commons Library, specialising in the economy.
Photo by Inés Castellano on Unsplash