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Economic update: UK facing ‘severe recession’

The coronavirus lockdown is having a profound effect on the economy.

Large sections are closed for business, household incomes are under pressure and there is deep uncertainty over future economic prospects. Earlier this month, the Chancellor told the House of Lords Economic Affairs Committee that the UK was facing a “severe recession the likes of which we haven’t seen.”

There have been sharp falls in GDP, increases in claims for unemployment-related benefits, and increases in government borrowing of the kind not seen for generations. It also looks at the latest inflation figures.

There’s been a sharp fall in GDP

Data on the output of the economy, from January to March, only take account of the first few days of the lockdown.

Nevertheless, the figures paint a gloomy picture: UK economic output fell by 2.0% in the first three months of 2020, compared with the previous quarter. This is the largest fall since 2008.

The contraction was seen across all sectors. Output in the services sector was down by 1.9%, manufacturing down by 1.7% and construction down by 2.6%.

Spending by households, by far the largest component of GDP, fell by 1.7% compared with the previous quarter. Trade was affected particularly badly with imports falling by over 5% and exports down by more than 10%.

Looking at monthly figures, GDP fell by 5.8% in March compared with February. This is the largest fall since monthly GDP records began in 1997.

It seems inevitable that the UK is now in recession, defined as two consecutive quarters of falling output. As noted above, GDP fell in the first quarter of 2020 and will fall further in the second quarter as significant parts of the economy have shut during the lockdown.

On average, economic forecasters expect GDP to fall by 7.9% in 2020. This would be the largest fall in GDP since the annual series began in 1948.

The largest annual fall in GDP seen to date was 4.2% in 2009. The Office for Budget Responsibility has set out a “coronavirus reference scenario” in which GDP falls by nearly 13% in 2020. It has stressed this is not a forecast but an ‘illustrative scenario’.

Claimant count up by 850,000

Most of the available data on the labour market cover the period January to March 2020. They are therefore hardly affected by the pandemic. Some data are available for April and already show the effects of the lockdown.

The number of people claiming unemployment benefits (the claimant count) increased by nearly 70% between March and April, reaching 2.1 million. This is its highest level since July 1996. This illustrates the profound effect the pandemic is having on the UK economy. 

The number of claimants increased by over 850,000. This is by far the largest monthly increase since official records began in 1971. In addition, 8 million jobs had been furloughed by 17 May.

In the three months to March 2020, the number of weekly hours worked fell by 1.2% (12.4 million hours) compared with a year earlier. This is the largest fall for ten years.

Experimental statistics indicate this was mainly due to a fall in the number of hours worked in the last week of March. This was nearly 25% down on the other weeks of 2020.

Government borrowing hits record high in April

The economic effects of the pandemic can also be seen in a sharp rise in government borrowing.

While the figures for April are likely to be revised, it is clear that Covid-19 is having a huge effect on the public finances. Government borrowing was £62.1 billion in April 2020 compared with £10.9 billion in April 2019.

This is the highest level of monthly borrowing since official records began in 1993 and is only marginally lower than the level of borrowing in 2019/20 as a whole.

Inflation down due to lower fuel prices

Inflation, as measured by the Consumer Prices Index, was 0.8% in April, down from 1.5% in March.

This is the lowest rate of annual inflation since August 2016. The main reasons for the fall in inflation were lower petrol and diesel prices, together with falls in the cost of domestic energy. 

The price of petrol fell by more than 10p a litre between March and April, as the price of oil on international markets fell sharply. This is the largest monthly fall since records for the price of unleaded petrol began in 1990.

The lockdown affected the Office for National Statistics’s (ONS) ability to measure the prices of all the goods in its ‘basket’ in April. It was unable to measure the price of around 90 items as markets for these products were effectively closed. These unavailable items included haircuts, draft beer and theatre admissions. The ONS has put a range of measures in place to deal with the challenges of measuring the prices of these unavailable goods. 

Further reading

The Library has looked further into the possible impact of coronavirus on the economy in its briefing, Coronavirus: Effect on the economy and public finances and we continue to update our briefing on the latest economic data.

The Library’s UK economy dashboard updates when key economic data are published. The dashboard includes topics such as economic growth, inflation, unemployment and the public finances.

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