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ONS Q1 GDP data ‘just the beginning’

13 May 2020

UK first quarter GDP shrank by 2% quarter-on-quarter, it’s sharpest contraction since the fourth quarter of 2008, as the Coronavirus pandemic crippled the economy.

Figures from the Office for National Statistics revealed that the decline largely reflected a record 5.8% fall in output in March, with widespread monthly declines across the services, production and construction industries as the government shut down much of the country.

While the 2% contraction was slightly lower than the 2.6% consensus forecast, markets are bracing themselves for a much steeper decline in the second quarter.

Earlier this month, the Bank of England warned that the economy could contract by 25% during the three months from April-June as households remain under lockdown.

David Page, head of macro research, AXA Investment Managers, said that at face value, the latest figures could offer “relative encouragement” that the scale of decline could be less than worst fears but warned that first estimates of GDP are still prone to revision.

Page said: “Based on the UK moving seamlessly towards shutdown in March, Q1’s figures suggest that the UK’s level of economic activity under full lockdown is not as low as we had estimated. Of course, this takes much at face value. Exactly how national statistics have accounted for the missing ‘hard data’ at this stage of estimation could be critical in determining how close this estimate is to the true contraction and what future revisions may bring.”

Page said the outlook remains “highly uncertain” and the firm retains a pessimistic bias, with a second quarter GDP contraction of 19.5% quarter-on-quarter and a full year contraction of 8.7%.

Artur Baluszynski, head of research, Henderson Rowe, said the 2% figure could be better than expected because the real impairment of the consumer demand is likely to show up in the April data.

According to the official figures, services output fell by a record 1.9% in the first quarter, driven by a 6.2% decline in March, while household consumption fell by 1.7% during the three month period to March – the largest contraction since the fourth quarter of 2008.

Commenting on the figures, Rupert Thompson, chief investment officer, Kingswood, said: “The declines were somewhat smaller than expected but little comfort should be drawn from that as the economy looks certain to see a much larger contraction over coming months. With the lockdown looking set to be relaxed only very gradually, a drop in GDP of the order of 25% remains quite probable in the second quarter.”

Ben Kumar, senior investment strategist, Seven Investment Management, said investors should be wary that the real picture could be even worse than the preliminary figures but warned them not to panic.

Kumar said: “If we had four quarters like this the UK would be in a dire situation, but thankfully the expectation is that the economy will quickly bounce back once lockdown is over. The uncertainty as to the path of the virus is clearly still a major headwind, but investors must look through this to some extent.”

He added: “Investors shouldn’t panic, because unlike every other recessions we have seen, we know the exact cause of this and we known the solution and the government is doing everything it can to get people back to work.”

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