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Financial News: UK Economy Logs Biggest Contraction Since 1955

UK Economy Logs Biggest Contraction Since 1955

08/12/2020 - 07:03:00 (RTTNews)

(RTTNews) - The UK economy contracted at the fastest pace on record in the second quarter amid the coronavirus pandemic, despite signs of recovery taking hold in June after the relaxation of restrictions on movement.

Gross domestic product contracted by 20.4 percent sequentially in the second quarter, following a 2.2 percent drop in the first quarter, the Office for National Statistics reported Wednesday.

With the second consecutive fall, the economy has entered a technical recession. The latest fall was the biggest contraction since the records began in 1955. Economists had forecast a quarterly fall of 20.5 percent.

"It is clear, that the UK is in the largest recession on record," the ONS said.

Second quarter GDP was 22.1 percent below the final three months of 2019, which is more than three times greater than the total fall during the next largest period of recession, which occurred during the global economic downturn of 2008 to 2009, the statistical office added.

"Today's numbers show that hard times are here," Chancellor Rishi Sunak told BBC. He expects many more people to lose their jobs.

"Although tough decisions lie ahead, we will get through this and nobody will be left without hope or opportunity," Sunak added.

Latest ONS estimates show that the UK economy is now 17.2 percent smaller than it was in February, ahead of the Covid-19 outbreak.

On a yearly basis, GDP plunged 21.7 percent in the second quarter but smaller than the economists' forecast of 22.4 percent.

As the full scale of the fallout in unemployment has yet to be felt and as GDP may take 12-18 months to climb back to its pre-coronavirus level, it's going to feel like a recession for a long time yet, Paul Dales, an economist at Capital Economics, said.

The UK economy is likely to experience a decent rate of growth during the third quarter, but importantly it will be at least a couple of years before all of the lost ground is recovered, James Smith, an ING economist, said.

Consumer caution, the unwinding of the Job Retention scheme and the end of the post-Brexit transition period pose risks to the recovery, Smith noted.

There have been record quarterly falls in services, production and construction output in the second quarter. Services output decreased 19.9 percent and production output fell 16.9 percent. Construction output contracted more sharply, by 35.0 percent.

Private consumption accounted for more than 70 percent of the fall in the expenditure measure of GDP in the second quarter, falling by a record 23.1 percent. Gross fixed capital formation declined 25.5 percent and business investment was down 31.4 percent. Meanwhile, government consumption advanced 14.1 percent.

The UK logged a trade surplus of 4.0 percent of GDP in the second quarter, data showed.

In June, the monthly GDP growth accelerated to 8.7 percent from 2.4 percent in May. All sectors posted faster growth, with construction registering the biggest increase of 23.5 percent.

The dominant service sector grew 7.7 percent in June. At the same time, production advanced 9.3 percent and manufacturing gained 11 percent. Farm output climbed 2.7 percent.

The economy began to bounce back in June with shops reopening, factories beginning to ramp up production and housebuilding continuing to recover, ONS Deputy National Statistical for Economic Statistics Jonathan Athow said. Despite this, GDP in June still remains a sixth below its level in February, before the virus struck, Athow added. In June, the visible trade deficit widened as the increase in imports far exceeded the rise in shipments. The visible trade gap rose to GBP 5.12 billion from GBP 1.76 billion in May, the ONS said in a separate release.

Exports and imports of goods climbed 6.9 percent and 18.8 percent, respectively.

Consequently, the total trade surplus declined to GBP 5.34 billion from GBP 7.66 billion a month ago.

Another report from the ONS showed that labor productivity posted its biggest fall on records in the second quarter. Labor productivity decreased 2.5 percent on quarter.

Reflecting the impact of the furlough scheme, output per worker plunged 19.9 percent from the first quarter.

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