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UK has long road to economic recovery with further monetary stimulus required

12 August 2020

The UK economy suffered a record slump during the second quarter as the Covid-19 pandemic pushed the country into recession. 

According to the Office for National Statistics, GDP fell by 20.4% between April and June, with services, manufacturing and construction all suffering record falls in output during April.

The sharp contraction follows a 2.2% dip during the first quarter of the year and means the UK has entered its first recession since 2009.

Experts have warned that the UK now faces a long road to economic recovery.

Richard Pearson, director, EQi said: “While the news comes as no surprise, it is shocking to see how far the economy has fallen since the pandemic started.

“And it’s probably not over yet. The easing up of lockdown continues to be slow in some sectors, such as hospitality, and the threat of local flare ups of Covid-19 mean even those business that are open may have to shut again temporarily.

“Commentators still speculate over what kind of a recovery we will see but given the continued bad news around job losses and businesses going under, the recovery is likely to be a long haul and could result in a total reshaping of the economy as we know it.”

The ONS figures revealed a slight bounce-back in economic activity in June, following the easing of lockdown and social distancing measures which allowed some businesses to resume trading. However, activity was still considerably below pre-lockdown levels.

The ONS said monthly GDP rose by 8.7% in June but was still 17.2% below February levels. The output of service industries remained 17.6% below the level of February, despite growing by 7.7% in the latest month. Meanwhile, production industries remained 11.6% below their February levels, while manufacturing declined 14.2% since February.

Derrick Dunne, CEO, Beaufort Investment, said: “While things may be moving in the right direction – albeit slowly – it’s important to remember that recovery will not be the same for every industry. Schemes like Eat out to Help Out will no doubt provide some welcome relief for restaurant bosses, but the government will need to think carefully about how to support other sectors such as travel, which will continue to struggle without intervention.”

The UK appeared to fare worse than its European counterparts, experts said, with output collapsing at more than double the pace of Germany during the second quarter and shrinking further than Spain.

According to Karim Yousfi, chief global strategist, Audacity Capital: “The OECD’s prediction that Britain’s recession will be the worst of any major economy is fast becoming a painful reality.

“Hopes that Britain’s dominant services sector – in which many jobs can be done from home – would provide an anchor for the economy have so far proved overly optimistic. Service sector output shrank by a fifth in Q2. The UK still has a mountain to climb, and sterling will be doing it with bag of rocks on its back.”

Hinesh Patel, portfolio manager, Quilter Investors, believes further monetary stimulus will be required to get the economy moving.

“Economic output remains at a fraction of what it was in February, and as such it is clear further stimulus is going to be required. The UK relies so heavily on the services sector and consumer consumption (and) the fact of the matter is that many industries are still going to struggle through the recovery.

“While the overall picture is shocking, the Bank of England has left itself room to act from a monetary perspective. This shifts eyes onto Rishi Sunak to see if his innovations can be successful. The Eat Out to Help Out scheme appears to have gotten off to a good start, and it is this more targeted stimuli that other industries will be craving. The UK public loves a deal, so this scheme may provide a template for future targeted stimulus. The house builders in particular will be watching it closely, particularly given the proposed relaxation in planning laws.”

The sharp drop in economic activity has also sparked further fears for unemployment, with figures released earlier this week revealing a 220,000 drop in employment during the second quarter – the largest quarterly fall since the financial crisis. A further 81,000 people were made unemployed in July, taking the total figure to 730,000 since March.

Laura Suter, personal finance analyst, AJ Bell, commented: “The biggest impact of any recession on households will be job losses. Unemployment figures released yesterday showing that three-quarters of a million fewer people were working in July compared to March. The Bank of England expects this figure to jump further as the Government’s furlough scheme is unwound and estimates around 2.5 million people will be unemployed by Christmas, meaning more pain is still to come.”

Suter added: “A second wave of the virus will hamper any rebound, as will the effect of some of the localised shutdowns we’ve seen in recent weeks. The much-talked-about V-shaped recovery of the UK economy relies on no second lockdown and also on UK trade talks being successful – presenting two large uncertainties.”

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