When COVID-19 lockdown steps were in place, and people had little opportunities to spend, Britain experienced a record drop in economic growth in the second quarter of 2020. Still, the drop was marginally smaller than first expected.
The drop was the largest since the ONS started keeping records in 1955. Other data suggests that Britain is on track to have its worst annual decline since the 1920s.
As the country entered lockdown in late March, the economy had already shrunk by 2.5 percent in the January-March timeframe.
Households saved a record 29.1% of their income in the second quarter, up from 9.6% in the first quarter, as their freedom to spend in stores and restaurants was severely limited during the lockdown. However, incomes were bolstered by a government job program that expires next month.
“So far, economic data has outperformed the Bank of England’s initial expectations,” said Jon Hudson, a fund manager at Premier Miton. “However, with COVID-19 cases returning and restrictions tightening, that may soon change,” he added.
With over 42,000 deaths, COVID-19 has claimed the lives of the most people in Europe.
When comparing production in the second quarter to the same quarter a year ago, the UK’s GDP is down 21.5 percent, the same as Spain’s, while France’s is down 19.0 percent.
The British economy has rebounded sharply since the lockdown was eased in May. Bank of England Governor Andrew Bailey said on Tuesday that the economy would show a 7-10 percent annual decline in the third quarter.
However, he cautioned that the growth was likely to slow, with unemployment expected to hit 7.5 percent later this year, COVID controls still in place in certain areas of the economy, and headwinds from a recent increase in cases.
Much of the United Kingdom is under a partial lockdown due to regional COVID spikes, limiting people’s ability to encounter people who are not in their homes – affecting the hospitality industry in particular – while schools and workplaces remain accessible.
The UK’s current account deficit, which is usually one of the country’s most vulnerable areas, shrank significantly to 2.8 billion pounds ($3.59 billion), or 0.6 percent of GDP, its lowest level in nine years, thanks to a drop in foreign trade triggered by the pandemic.
Worst of the G-7 countries
The quarterly contraction in the United Kingdom is by far the most severe among comparable advanced economies. France’s GDP shrank by 13.8 percent, Italy’s by 12.4%, Germany’s by 10.1 percent, Canada’s by 12 percent, the United States by 9.5 percent, and Japan’s by 7.6 percent.
According to UK Finance Minister Rishi Sunak in an interview with Sky News on Wednesday morning, the primary reason for this is the “composition” of the British economy.
“Social events, such as eating out, going to the movies, shopping, and other similar activities, account for a much greater portion of our economy than they do in most of our comparative European countries,” Sunak said.
Possibilities for recovery
Economists predict a strong recovery in the third quarter as the impact of the lockdown’s fades, assuming the UK avoids a second surge and the 8.7% gain in June has reaffirmed this view. The Bank of England expects an 18 percent increase in the third quarter.
However, a hidden blow to the labor market and the end of the Brexit adjustment phase at the end of the year are widely expected to hamper the fourth-quarter recovery.
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