Contraction of GDP ‘less severe’ than expected.
Official figures have revealed that the UK’s gross domestic product (GDP) contracted by 19.8 per cent in the second quarter, compared to a previous estimate of over 20 per cent.
Stats from the Office for National Statistics (ONS) estimated that the GDP had reduced by 20.4 per cent in the three months to June (during the height of lockdown) compared to the previous quarter. While the 19.8 per cent drop still represents the largest reduction since records began in 1955, it offers a more positive picture than previously expected.
In contrast, the second quarter figure was changed from the estimate of 2.2 per cent to an accurate figure of 2.5 per cent. While this demonstrates a greater reduction than previously estimated, it still leaves the overall GDP contraction at 21.8 per cent compared to the estimate of 22.1 per cent.
According to the ONS the figures, while more positive than once thought, do confirm that the UK suffered the worst recession of all the G7 advanced nations during the first half of 2020. France was found to be the next in line, with a GDP of 18.9 per cent, while Italy contracted by 17.6 per cent. Conversely, the US GDP reduced by 10.2 per cent and Japan saw an even smaller reduction of 8.5 per cent.
Commenting on the UK’s economic picture, Andy Haldane, the Bank of England’s chief economist, warned that Britain’s “pessimism” was partially responsible for the country’s struggle to recover its economy. In fact, he warned that the GDP figure could lead to “catastrophising” and reduce the chances of the economy bouncing back.
Mr Haldane did acknowledge that a second wave of coronavirus could slow economic recovery, but stated that unemployment is expected to rise at a lower rate than the 7.5 per cent estimate from the Bank of England.
He said: “Averting an economic anxiety attack calls for a balanced and flexible approach to the words and actions of businesses and policymakers. Encouraging news about the present needs not to be drowned out by fears for the future.
Mr Haldane’s comments came after figures demonstrated that consumers were cautious with their spending during the second quarter. In fact, while lockdown was in force, the limited ability of the public to spend resulted in the household saving ratio increasing to a record 29.1 per cent. This was up from just 9.6 per cent in the previous three months.
Figures revealed that household spending reduced by £80.5 billion or 24.2 per cent, which is the largest quarterly reduction in household spending since records began. Most of this reduction in spending fell across the restaurant, hotel and transport industries, as well as recreation and cultural services.
Businesses also reduced their spending, with investments for companies dropping by 26.5 per cent in the second quarter. This was found to be the fastest drop on record, and a significantly greater drop than the 9.8 per cent figure of the 2008 global economic turndown.
While the GDP figures for August are yet to be released, analysts have predicted that the UK economy will register a record expansion during the third quarter. However, the increasing number of coronavirus cases have prompted some economists to suggest that this growth could be stalled before figures return to pre-pandemic levels.
Commenting on the current position of the economy, Ruth Gregory, senior UK economist at Capital Economics, said: “The renewed Covid-19 restrictions will probably mean that GDP stagnates in Q4, leaving economic activity marooned 5.5 per cent short of its pre-crisis level. The risk now is that renewed containment measures send the recovery into reverse.
Author: Steven English
04.11.2020
