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News | Business | Economy | UK: UK economic slump worst in Europe in second quarter

Delphine Strauss



The UK economy suffered a bigger slump than any other major European economy in the second quarter, shrinking by a fifth and falling into its deepest recession on record.
Official data released on Wednesday showed that gross domestic product fell 20.4 per cent quarter on quarter, with widespread contractions across all sectors.
The figures confirm that the pandemic has hit the UK harder than other developed economies. After the second-quarter contraction, the decline in UK GDP since the end of 2019 is double that in the US and second only to Spain among European peers.
A recovery from the depths of the lockdown gained momentum in June, with output growing 8.7 per cent month on month — faster than most economists had expected, although broadly in line with the Bank of England’s latest predictions.
This means GDP has grown 11.3 per cent since its April low, but remains 17.2 per cent beneath its level in February, before the coronavirus crisis hit.

Column chart of UK real GDP, % change compared with previous quarter showing Government restrictions severely curtailed economic activity in the second quarter
“The recession brought on by the coronavirus pandemic has led to the biggest fall in quarterly GDP on record,” said Jonathan Athow, ONS deputy national statistician.
“Overall, productivity saw its largest fall in the second quarter since the three-day week,” he added, referring to a measure introduced in 1973.
Sterling was little changed at about $1.30 following the release of the data. The FTSE 100 stock index, however, outperformed its European peers early on Wednesday morning, rising 0.6 per cent.
Rishi Sunak, the chancellor, said in response to the data: “Today’s figures confirm that hard times are here . . . But while there are difficult choices to be made ahead, we will get through this.”
The figures led to renewed calls from business groups for the government to extend wage support through the furlough scheme and step up other forms of support for the economy.

Column chart of Change in GDP in Q2 2020 vs Q1 2020 (%) showing The fall in UK GDP in the second quarter was the worst among its peers
Tej Parikh, economist at the Institute of Directors lobby group, called for cuts in employers’ national insurance contributions to support hiring, and for the Treasury to explore options for restructuring business loans.
Fhaheen Khan, economist at Make UK, the manufacturers organisation, said the government should be “flexible in extending job support schemes in the same way as our competitors”.
Alpesh Paleja, economist at the CBI employers group, said the dual threat of a second wave of infection and slow progress over Brexit talks underlined the need for “maximum agility” from government.

Line chart of UK monthly GDP (2016 = 100) showing Some recovery was evident in June
James Smith, research director at the Resolution Foundation, a think-tank, added: “Although today’s data tells us that the economy is recovering as lockdown restrictions ease, it still has a long way to go. And that challenge will be bigger for the UK than for most other rich countries.”
Analysts said the UK’s underperformance was partly due to the length of its lockdown, and partly because the consumer-facing services sector that was hardest hit by social distancing has a bigger weight in GDP, accounting for 80 per cent of the economy.
The services sector fell 19.9 per cent quarter on quarter, accounting for three-quarters of the fall in GDP. With much of the hospitality and leisure sectors still closed in June, its recovery has been slower than that of other sectors, with services output up 7.7 per cent month on month, largely due to a strong recovery in car sales. This compared with an 11 per cent rebound in manufacturing.
Construction was hardest hit over the quarter as a whole, but has also bounced back faster, with a month on month jump of 23.5 per cent in June.
The ONS set out record quarter-on-quarter falls in household spending, driven by the slump in expenditure on tourism, hospitality and transport, and in government spending. The latter was due to school closures and the postponement of non-urgent healthcare.
It also highlighted the risk of a prolonged slump in business investment, which has fallen by a record 31.4 per cent since the first quarter, with Bank of England surveys suggesting that most businesses have cancelled or postponed non-essential spending, especially in consumer-facing sectors.
Dean Turner, economist at UBS Wealth Management, said that although the quarterly numbers were bleak, the upbeat June figures suggested there was a “strong bounce in activity as the economy emerged from lockdown”.
“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,” he said.
Additional reporting by Adam Samson

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