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UK enters recession after GDP plunged by a record 20.4% in the second quarter

  • GDP (gross domestic product) expanded by 8.7% in June as government lockdown measures eased, having shown a meek 1.8% recovery in May following April’s 20.4% contraction.
  • The 20.4% second-quarter plunge follows a 2.2% contraction in the first quarter.
  • Analysts had expected a fall of 20.5% according to a Reuters poll.

The U.K. economy contracted by 20.4% in the second quarter of 2020, compared to the previous three months, as coronavirus-induced lockdowns hammered activity, according to preliminary figures released Wednesday.

GDP (gross domestic product) expanded by 8.7% in June as government lockdown measures eased, having shown a meek 1.8% recovery in May following April’s 20.4% contraction.

The second-quarter plunge is the worst on record and follows a 2.2% contraction in the first quarter. Analysts had expected a fall of 20.5%, according to a Reuters poll. Two consecutive periods of contraction mean the British economy is now in a technical recession.

Services, construction and production all saw record quarterly falls, particularly in the sectors most exposed to government restrictions, according to the Office for National Statistics (ONS).

“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.”

In level terms, real GDP was last lower in the second quarter of 2003, while compared with the second quarter of 2019, the U.K. economy tumbled by 21.7%.

The ONS noted that its estimates are subject to greater uncertainty than usual, owing to the difficulties faced in data gathering due to public health restrictions.

Worst in the G-7

Britain’s quarterly contraction is by far the deepest among comparable advanced economies. French GDP contracted by 13.8%, Italy 12.4%, Germany 10.1%, Canada 12%, the U.S. 9.5% and Japan 7.6%.

In an interview with Sky News Wednesday morning, U.K. Finance Minister Rishi Sunak said the primary explanation for this was the “composition” of the British economy.

“Social activities, for example going out for a meal, going to the cinema, shopping, those kinds of things comprise a much larger share of our economy than they do for most of our European comparative countries,” Sunak said.

“So in a situation where you have literally shut down all those industries for almost three months, a long period of time, it is unfortunately going to have an outsized impact on our economy.”

Britain’s hospitality sector, the worst hit by the coronavirus pandemic, accounts for around 5% of U.K. GDP, according to trade association UKHospitality.

Recovery prospects

Economists expect a sharp rebound in the third quarter as the burden of lockdowns diminishes, providing the U.K. can avoid a second wave, and the 8.7% bounce in June has reaffirmed this base case. The Bank of England has forecast an 18% third-quarter jump.

However, a latent hit to the labor market and the deadline of the Brexit transition period at the end of the year are broadly expected to weigh on the recovery in the fourth quarter.

The government has announced that its furlough scheme, which subsidized wage for millions of workers sidelined due to the pandemic, will be wound down over the next few months and terminated in October.

“We expect pent-up consumer demand to drive a strong recovery in the third quarter, although this momentum will gradually fade as the outlook for the labour market deteriorates,” said Dean Turner, economist at UBS Global Wealth Management. He added that the U.K. economy is unlikely to return to its pre-crisis level before the end of 2021.

ING Developed Markets Economist James Smith said rising unemployment is “probably the biggest threat to the recovery at the moment, and this is being linked to the gradual unwinding of the government’s furlough scheme over the next few months.”

“Many firms, particularly in the hardest-hit hospitality/recreation sectors are still struggling as a result of ongoing consumer caution and social distancing constraints,” Smith said.

Source
cnbc

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