Lock On Effect: Coronavirus infects the UK economy leading to symptoms of recession

September 21, 2020

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3 min read

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What's going on here?

Severe falls in economic output during the Coronavirus lockdown has caused the UK economy to contract by one-quarter.

What does this mean?

A recession occurs where there are contractions in the economy in two consecutive quarters. The UK economy first contracted by about 2% in the first quarter (Q1) of 2021, and then by 20% in Q2, so we’re now in a technical recession. The UK economy’s contraction in Q2 of 2021, which is measured by GDP (gross domestic product), is ten times worse than its highest period of contraction during its 2008 recession. This contraction is one of the highest in comparison with other countries, such as France (14%), Germany (10%) and the USA (10%).

What's the big picture effect?

The biggest drops in economic output occurred in the services, construction and production-oriented industries. Those sectors that were most exposed to government restrictions were hardest hit. Output in the construction sector fell by 40% in April, the sharpest fall since records began in 2010. Builders cannot, like in office-based professions, work remotely – so social distancing guidelines made it near-impossible for their work to continue. International trade saw unprecedented declines, with imports falling at a monthly rate of 26% and exports by 19%. This particularly affected trade in cars, fuels, works of art and clothing. Again, social distancing abroad meant factory workers could not continue their line of work – so many closed down temporarily. Also, incomes were falling, so demand for these types of goods was reduced.

The UK economy fared worse than other countries due to how it is made up. Service industries accounted for about 80% of the UK’s total economic output in 2019, and also for 81% of workforce jobs in April-June 2020. The hospitality sector alone accounts for 5% of UK GDP. Not surprisingly, the reduction in services between Q1 and Q2 aligns near perfectly with the economic contraction – 20%. Shutting down sites like restaurants, hotels, cinemas, shops and so on had a huge impact on the economy.

The economy is, however,  recovering slowly. GDP increased by 8.7% in June as government lockdown measures eased, improving on a smaller 2% recovery in May. This was caused by shops reopening, factories restarting and housebuilding recovering. It is still well below its level in February, when GDP was 20% higher than it is now. The UK’s PMI (Purchasing Managers’ Index), an indicator of economic health for manufacturing and service sectors, also expanded at the fastest rate in five years from July to August 2020. 

Assuming there is no “second wave” of Covid-19 (a big assumption), the Bank of England forecasts the economy to rebound by 18% in Q3. But there are signs that this optimism is unrealistic. The government’s proposed termination of its furlough scheme in October may risk mass unemployment. In a British Chambers of Commerce survey, only 43% of businesses said they planned to use a bonus scheme paid to employers who retain furloughed staff until January 2021 – and 40% said plainly that they would not use it.  Even before these changes, unemployment has risen to 8%. Even without these risk factors, it is still expected to take until the end of 2021 for the UK economy to fully return to its pre-crisis level.

The UK economy has suffered a huge blow during the Covid-19 crisis – much, much worse than what it experienced in our last recession. The government remains optimistic that it will rebound quickly, but realistically, it will probably take a lot longer.

 

Report written by Arun Allen

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