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Economic update: Unprecedented fall in GDP marks low point of recession

The magnitude of the recession caused by the coronavirus outbreak is now more evident. GDP was around 25% lower during the depth of the crisis in April than in February.

While a recovery is underway, there is uncertainty over how fast economic activity is regaining lost ground and how high unemployment levels will rise.

GDP falls by a quarter

Official economic data for April, the period when lockdown measures were at their most stringent, have now been released.

GDP, which is the total value of all goods produced and services provided in the UK, was 25% lower in April compared to February.

This offers a rough measure of the impact of Covid-19 given the full lockdown was announced on 23 March. For some context, this is over three times the 7% decline in GDP recorded during the financial crisis in 2008/09.

From March to April, GDP fell 20.4%. This is by far the biggest decline in the official monthly GDP data series (available from 1997). It is also very likely the largest fall in the post-Second World War era.

Some sectors hit particularly hard

Most parts of the economy saw big declines in output. The services sector experienced a 24% drop between February and April, while manufacturing output declined by 28%. However, some industries were especially badly affected.

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.

Some sectors experienced smaller falls. Output in the information and communication sector was down by 15% and financial services saw a 6% decline.

Recovery is under way…

Since May, the Government has announced relaxations of lockdown measures. For example, most non-essential retailers have been allowed to reopen from 15 June.

As a result, economic activity has picked up from April’s low point. Retail sales were up 12% in May compared to April, underpinned by rising sales from DIY stores (as they re-opened) and internet sales. Overall retail sales levels were still 13% below pre-Covid-19 levels. Further gains are likely to be shown in June’s data.

Indicators of business activity also show improvements. The closely-watched purchasing managers’ index (PMI), often used as a proxy for GDP growth, bounced back in May and June.

…but how strong will it be?

Other indicators that have come to prominence as economists seek more-timely data also show a recovery underway. These include ‘mobility reports’, from Google and Apple among others, and data from debit and credit card spending.

Andy Haldane, the Bank of England’s Chief Economist, in a 30 June speech used a range of these indicators to paint a relatively optimistic view of the recovery to date.

Most economists are more circumspect in their evaluation of the recovery. The initial rebound from the depths of the recession was to some extent expected as the economy reopened. The key question is how long will it take consumers and businesses to return to pre-Covid 19 levels of spending?

The continuation of social distancing and the possibility of the spread of the virus accelerating, pose serious risks to the speed of the recovery. Uncertainty may also rein in consumers’ appetite to spend and businesses’ inclination to invest.

The risk of unemployment

Unemployment has increased, hours worked fallen and job vacancies declined. Nevertheless, the Government’s interventions in the economy, via its business and employment support schemes, have mitigated the full impact of the recession on the labour market.

Over 9 million jobs have been supported by the Coronavirus Job Retention Scheme (the furlough scheme), with 2.6 million self-employed workers also receiving financial support. 79% of businesses surveyed by the Office for National Statistics say they have applied to use the furlough scheme.

The furlough scheme is scheduled to run until the end of October, with the grant from the Government to businesses being tapered from August. A key issue for the economic outlook is how many employees currently furloughed will return to work and how many will become unemployed.

The average forecast from economists is for the unemployment rate to reach 8% by the end of 2020, double its pre-virus rate of 4%.

Government policy announcements

In an effort to boost the economic recovery, the Government is announcing a series of policy initiatives.

On 30 June, the Prime Minister announced the Government’s plans to bring forward around £5 billion of infrastructure spending. This includes investment on hospitals, schools and transport. Changes to the planning system were also proposed.

The Chancellor is scheduled to provide a ‘summer economic update’ on Wednesday 8 July, with further details of the Government’s plans set to be announced. The Library will publish a background briefing on Monday 6 July.

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