UK recession likely worse than expected with 25% contraction this quarter
With wage subsidies driven by the Covid-19 extended until October, and consumer spending falling, the country is hurting
London — The UK economy shrank almost 6% in March as the nation went into lockdown, plunging it into what may be its deepest recession in more than three centuries.
The sharp decline is only a small part of the damage of the restrictions to control the coronavirus, which were in place for all of April and look set to endure in some form for months to come. The measures heaped misery on an already tepid economy, with the Bank of England (BOE) forecasting a staggering 25% contraction this quarter.
This highlights the monumental task the government faces in restarting the economy as it begins to take small steps towards easing the lockdown. It’s extended an aid programme for workers, while the central bank will probably pump even more stimulus into the economy to keep the motor running.
The UK lockdown was imposed on March 23, meaning only about a week of the first quarter was affected. That was still enough for a 2% contraction in the three months, the worst since the financial crisis.
The damage in March was widespread, but the huge services sector took the brunt. Travel and tourism plunged 50%, while accommodation fell by 46% and air transport by 44%. Manufacturing and construction also contracted.
The economy has now failed to grow for three of the previous four quarters, after months of political and Brexit uncertainty meant the UK entered the latest crisis on a weak footing.
In a sign of the scale of the latest challenge, chancellor of the exchequer Rishi Sunak, on Tuesday, extended wage subsidies for furloughed workers until the end of October at a cost of billions of pounds to the public purse.
The Telegraph newspaper reported a leaked treasury assessment about the cost of the crisis to the government. The “base case” saw the deficit, forecast at £55bn before the pandemic, rise to £337bn. The “worst-case scenario” saw it hit £516bn.
Meanwhile, the BOE, which has cut interest rates to 0.1% and restarted bond purchases, has indicated more easing could come as soon as next month. It expects a strong rebound in 2021 after a 14% slump this year but many analysts regard such a scenario as overly optimistic.
“It’s now very hard to imagine a rapid ‘V-shape’ recovery, and we don’t expect a return to pre-virus levels of activity until 2022 at the earliest,” said James Smith, an economist at ING.
Consumer spending, the engine of the economy, fell 1.7% in the first quarter, the largest drop since the financial crisis, and it’s set to fall further.
Separate reports on Wednesday showed spending has collapsed more in recent weeks. The British Retail Consortium said its measure of sales fell 19.1% in April from a year earlier — the worst since records began in 1995 — while Barclaycard’s own gauge of transactions fell 36.5%.