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30 Jun, 2020 08:27 30 Jun, 2020 09:54

UK GDP suffers biggest fall in 40 years amid Covid-19 crisis

Consumers slash spending in early days of lockdown

Economy braced for bigger impact in second quarter

The UK economy recorded its largest contraction in more than four decades, official figures revealed on Tuesday, as consumers cut spending in the first few days of the coronavirus lockdown.

Gross domestic product (GDP) fell by a more-than-expected 2.2% in the largest fall since the third quarter of 1979. The Office for National Statistics (ONS) had previously estimated a 2% drop but revised its figure after data showed a record 6.9% plunge in March.

But with the data only showing nine days of the lockdown, the second quarter was expected to show the pandemic’s full impact on the economy.

The Bank of England earlier this month warned the economy may have contracted by 20% in the first half of 2020.

The household savings ratio soared to 8.6% in the first quarter from 6.6% in the previous three months, reflecting the cutback in consumer spending.

Britain’s current account deficit ballooned to £21.1bn during the quarter, from £9.2bn in the fourth quarter of 2019 and exceeding the consensus of £15bn. As a share of GDP, it increased to 3.8% from 1.7%.

EY ITEM Club chief economic adviser Howard Archer said it was "evident that the UK economy witnessed a record GDP contraction in the second quarter", forecasting a 17% slump quarter-on-quarter.

"The EY ITEM Club also expects the economy to return to clear growth in the third quarter with GDP expanding close to 10% quarter-on-quarter. This assumes a further gradual easing of lockdown restrictions across the UK," he said.

Analysts at Pantheon Macroeconomics said the savings rate rise may have risen to record-high of about 20% in the second quarter.

"In theory, households’ spending could rebound to exceed incomes for a short while, if consumers deplete the extra savings accumulated during the lockdown," they said.

"But with consumers’ confidence likely to remain depressed by regular localised outbreaks of Covid-19 and rising unemployment, we expect households’ saving rate to settle well above pre-Covid levels, capping out the recovery in spending.

"Meanwhile, the downturn in capital expenditure likely will intensify later this year, given the recent slump in surveys of business confidence. As a result, we continue to doubt that the recovery will be fully V-shaped, and expect GDP still to be about 5% below its pre-virus level by the end of this year."

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Pilling and Co Stockbrokers Ltd. is not responsible for the content or accuracy of third party news articles and we may not share the views of the author.

We provide third party news for your convenience and information only and make no representation or endorsement whatsoever and hereby exclude all liability for any loss or damage that may be incurred by you as a result of your access or use. Please note that third party content may be subject to terms and conditions imposed by the third party owner of that content.