First-quarter slump just a foretaste of worse to come for UK economy

The first step into the deepest recession in living memory has been taken. With only two weeks of lockdown measures accounted for, Britain entered an economic slump unparalleled since the 2008 financial crisis.

But while the crash after the collapse of Lehman Brothers was supposed to be a once-in-a-lifetime occurrence, the early evidence from the Office for National Statistics for the first quarter of 2020 shows Covid-19 will easily eclipse the last crisis. And the worst damage is yet to come.

Almost no aspect of the economy was unaffected in March. Britain broke all records for a monthly decline in gross domestic product, just two weeks of restrictions needed to drastically alter the economic landscape. All three major drivers of growth – services, manufacturing and construction – went into reverse.

UK economy shrank by 2% in first quarter after record monthly plunge

GDP contracted by 5.8%, coming close in a single month to the entire loss of output during the 2008-09 recession.

There is little doubt that worse is to come. The ONS figures show that after the government imposed lockdown on 23 March, output collapsed by roughly a quarter. Surveys of business activity paint a similarly grizzly picture.

Official figures for the economy only provide a rear-view mirror view of the world as it was several weeks earlier. It is sufficiently sobering that GDP collapsed by 2% in the first quarter, but the Bank of England reckons this is only the warm up act for a much bigger decline.

In a scenarioin which lockdown restrictions are only gradually eased from June – broadly as the government plans – Threadneedle Street expects GDP to shrink by 25% in the second quarter, a contraction more than 10 times greater than the worst quarter of the financial crisis. The Bank predicts the economy will shrink by 14% overall in 2020, an impact that ranks alongside that of the Great Frost of 1709.

To make matters worse, Wednesday’s figures show the economy was in pretty bad shape before the coronavirus struck. Crippled by Brexit uncertainty after more than three years of directionless political wrangling, and against the backdrop of a trade war between the US and China, UK growth had flatlined in the last quarter of 2019.

The much-vaunted “Boris bounce” never arrived after the election, with only a soupcon of progress in January disappearing as the world economy succumbed to the damage from Covid-19.

From the early GDP data from across Europe, the economic impact in Britain is relatively tame. In the first quarter, the economies of France shrank by 5.8% , Spain by 5.2%, and Italy by 4.7%. But this is not surprising given that lockdown measures were introduced earlier in many EU countries, while Boris Johnson only belatedly changed course and bowed to pressure and introduced controls to limit the spread of the disease.

How long Britain remains in what is very likely to be the worst recession for three centuries will depend primarily on efforts to contain the virus, both at home and abroad.

On the bright side, there are hopes that the gradual lifting of restrictions from today will mark the low point for the economic slump. But an impatient dash towards restarting the economy could cause the infection rate to rapidly rise if restarting business and social activity helps spread the disease. A second bout of lockdown would be required, causing further damage to jobs and growth.

There are also hopes that the government’s emergency response may cushion the financial effect of the coronavirus pandemic on households and businesses, helping to maintain the UK’s productive capacity and fuelling a faster rebound.

But the bigger the impact, and the longer it takes to regain some semblance of normality in how the economy functions, the tougher it will be to achieve escape velocity. Given the emerging scale of the crisis, talk of a rapid bounce back could be wishful thinking.

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