Economy suffers worst quarter in 40 years

Via Yahoo Finance

The economy shrank more than expected in the first quarter of the year as households slashed spending, businesses cut investment, and school pupils stopped attending even though the lockdown had been imposed for only a few days.

Even NHS output fell as hospitals cancelled elective surgery in preparation for the pandemic.

GDP fell by 2.2pc as a result, the Office for National Statistics said – bigger than the 2pc decline previously estimated and steeper than any drop seen in the financial crisis. It is now the worst three-month period in 40 years.

Compared to the same period of 2019 the economy is 1.7pc smaller.

In March alone GDP fell by 6.9pc – worse than the 5.8pc previously estimated and a sign of the severity of the harm inflicted by lockdown.

It stands as a warning of the much bigger crash expected in the second quarter, which began in lockdown and has only started to reopen now, meaning the full force of the recession has yet to be revealed.

A key cause of the extra drop is a much bigger fall in household consumption.

Deprived of the ability to go out and spend at the end of March, and increasingly cautious about social contact even before that, family spending dropped by 2.9pc on the quarter – much bigger than the previous estimate of a 1.6pc decline.

This contributed to the 2.3pc contraction in the services industry, which accounts for 80pc of the economy.

Accommodation and food services crashed by more than 10pc as customers stayed away and venues were forced to close their doors.

READ ALSO  Commerzbank chairman and CEO bow out to give lender a fresh start

As households cut spending by £9.5bn, their savings surged to 8.6pc of their income, up from 6.6pc previously.

Samuel Tombs at Pantheon Macroeconomics expects this figure to hit a record high of around 20pc in the third quarter, with the longer lockdown preventing spending.

Education output slumped 6pc as pupils stopped going to school, and then schools themselves shut down for all bar children of key workers. 

That contributed to a 3.7pc drop in Government services in the quarter.

Despite extra spending, the state’s contribution to GDP actually fell, with education plunging and even health and social care dropping 4.2pc, as hospitals cancelled or postponed non-coronavirus treatments as the NHS opened up capacity to deal with the pandemic.

The production industries shrank by 1.5pc, driven by a drop in manufacturing. Car factory shutdowns sent production down just over 15pc in the quarter, with March’s output down by more than a third on the same month last year.

However, pharmaceuticals output increased, so the overall fall in manufacturing was smaller than previously realised.

Construction output contracted 1.7pc.

A few sectors bucked the trend. A modest amount of growth was eked out in financial services and insurance, which expanded by 0.4pc on the quarter, as well as real estate, which was up 0.3pc, and public administration, up 0.2pc.

The fall of 2.2pc might be steep by historical standards, but much worse is on the way in the second quarter.

Howard Archer of the EY Item Club expects GDP to fall by 17pc in the three months to June, followed by a rebound of 10pc in the third quarter as the economy reopens.

READ ALSO  Sticks and stones will break America unless we use our words

“Despite improvements in May and June, it is evident that the UK economy witnessed a record GDP contraction in the second quarter,” he said.

Into the third quarter “there should be some pent-up demand following the reduction in consumer spending in the second quarter due to the lockdown. Global economic activity should also improve in the latter months of 2020 as other economies recover from the impact of coronavirus.”

However, these predictions are based on a steady recovery. “A downside risk to the outlook is the possibility of a significant new coronavirus wave returning later in the year, requiring restrictions to be re-imposed,” he said.

“Another downside risk is that even with the relaxation of restrictions on activity, consumers and businesses may remain cautious in their behaviour for an extended period. The scale of the possible impact of job losses and business difficulties – despite Government support – is also unknown.”