UK economy shrinks by 2% as Covid-19 slump begins

Garden centres reopen as lockdown easing begins

Keen gardeners have seized the opportunity to return to garden centres as they reopened in England this morning.

Between 30 and 40 customers queued outside Chessington Garden Centre in Surrey before it reopened at 9am this morning.

Shoppers filled the trolleys with bright plants, hanging baskets and compost, with many saying they wanted to bring some colour to their pots and gardens.

Chessington Garden Centre

Chessington Garden Centre today Photograph: Joanna Partridge

Chessington Garden Centre

Chessington Garden Centre today Photograph: Joanna Partridge

Being allowed to reopen is a “relief” for managing director Jolyon Martin, although he says they have already lost 30% of their annual turnover – having been forced to close during almost two months of their peak sales season.

Joanna Partridge
(@JoannaPartridge)

It’s the day gardeners have been waiting for. Between 30 – 40 shoppers queued to get into Chessington Garden Centre as it reopened at 9am this morning pic.twitter.com/2Sp6A4Esud

May 13, 2020

Chancellor Rishi Sunak has also warned that UK is “very likely” entering a deep recession this year.

Laura Miller
(@thatlaurawrites)

Chancellor Rishi Sunak tells @ITVJoel ‘Yes, it is now very likely that the UK will face a significant recession this year’https://t.co/K6qG9KmFyk

May 13, 2020

And once the Covid-19 downturn is over, the UK will have to decide how it pays the bill.

Today’s Daily Telegraph reports that tax rises or a public sector wage freeze are being considered as options that might be needed to help the government cover the cost of the coronavirus crisis.

This raises the dire prospect of another bout of austerity… but Sunak insists it’s ‘premature’ to think about it.

Faisal Islam
(@faisalislam)

On Telegraph leak that says internally “v-shaped” bounce back seem as optimistic: Sunak: “ I think it’s premature to speculate. But what we do know is in order to make sure that recovery is as swift as strong as we will like it to be we need to take action now to protect jobs…”

May 13, 2020

Transport secretary Grant Shapps has also played this down, saying:


In terms of payment, we’ll have to have future budgets, we’ll get to that, but right now we are still in the midst of this thing and we’re clear that we’re not going to go back to world of austerity in order to do that.

Our main UK Covid-19 liveblog has all the details:

It’s worth noting that Britain’s borrowing costs are near record lows at present. The UK can borrow for 30 years at just 0.8% per year — so there’s plenty of appetite for gilts.

The Covid-19 recession is forcing Europe’s largest travel company, TUI, to cut 8,000 jobs:

Economists: UK economy faces much more pain

Economists don’t agree on everything. But the universal consensus is that today’s grim UK GDP figures are only a taster for what’s ahead of us.

Stefan Koopman, senior market economist at Rabobank, fears Britain will suffer a U-shaped recover, with a ‘double-digit’ slump in the April-June quarter:


“The UK’s economic engine will be much harder to kickstart than it was to stall, as illustrated by the latest raft of data releases. Talk of a V-shaped recovery feels like wishful thinking and we expect prolonged periods of depressed growth across the majority of the economy. A flatter, U-shaped recovery is more likely.

“Double-digit declines in GDP growth will follow for the second quarter and the full year, but forecasts for beyond that horizon are near-impossible to predict. The risk of a second lockdown should another outbreak occur combined with rock-bottom levels of consumer confidence make for a potent mix of issues for businesses to deal with.”

Hugh Gimber, global market strategist at J.P. Morgan Asset Management, fears the economy won’t recover from the Covid-19 shock until 2022:


“While economic activity should improve from the second half of this year, it still appears that a rebound is likely to be very gradual, and one that leaves GDP levels at the end of 2021 below where they finished 2019.”

Artur Baluszynski, head of research at investment managers Henderson Rowe, points out that other European countries fared even worse as they had tougher lockdowns (as explained earlier).


“The numbers are really bad, especially considering that the lockdown only started mid-March. One of the reasons why the -2% figure is better than expected is because the real impairment of the consumer demand is likely to show up in April numbers.

However, we can now see how the UK’s more relaxed lockdown measures helped the economy to fare better than France or Spain which contracted close to 6% over the same period.

But this doesn’t mean that the UK economy will spring back unharmed, explains Melanie Baker, senior economist at Royal London Asset Management:


“The economic damage from roughly only a week of lockdown is striking. Activity growth in April will be much worse.

“As social distancing is eased, we will probably see a strong initial bounce in activity. However, there isn’t a straightforward trade-off between social distancing and activity.

“Until businesses and households are confident that the virus poses little danger to lives and livelihoods, the recovery is likely to lag and activity levels will struggle to return to pre-crisis norms.”

Full story: UK economy shrinks by 2% after record monthly plunge

Here’s our economics editor Larry Elliott on today’s grim UK growth figures:


A record monthly plunge in activity meant the UK economy contracted by 2% in the first quarter of 2020, according to official figures.

Data from the Office for National Statistics revealed the immediate impact of the coronavirus lockdown, producing an unprecedented decline in output in March and the sharpest three-month contraction since the depths of the financial crisis in late 2008.

UK quarterly GDP

UK quarterly GDP Photograph: Office for National Statistics


Although restrictions on businesses and individuals were only introduced in mid-March, the ONS said it was enough to cause a 5.8% plunge in activity in March.

All three main components of growth, services, production and construction, were affected by the fallout from the global pandemic – with factories, shops, restaurants, hotels and building sites all closed on government orders.

Ruth Gregory, UK economist at consultancy Capital Economics, said: “March’s GDP figures showed the UK economy was already in freefall within two weeks of the lockdown going into effect. And with the restrictions in place until mid-May and then only lifted very slightly, April will be far worse.”

Service sector output – which accounts four-fifths of GDP – declined by more than 6% in March, while production fell by 4.2% and construction by 5.9%.

Over the year to the first quarter of this year, the economy grew smaller by 1.6% – its fastest rate of decline since late 2009.

Here’s Larry’s full story:

Aston Martin losses shows impact of Covid-19 crisis

Jasper Jolly

Prince Charles, Prince of Wales, admiring Aston Martin’s first SUV, the Aston Martin DBX, at its Lagonda factory in St Athan, Wales, in February

Prince Charles, Prince of Wales, inspecting Aston Martin’s first SUV, the DBX, at its Lagonda factory in St Athan in February Photograph: Chris Jackson/Getty Images

Aston Martin’s losses ballooned to £119m in the first three months of the year as the coronavirus pandemic caused the already struggling British carmaker’s sales to plunge across the world.

The company sold only 578 cars to dealers in the first quarter of 2020, down 45% from the same period in 2019.

Sales slumped by 86% in China in the quarter, while they were down by 57% and 30% in the Americas and Europe respectively, despite lockdown conditions not starting in earnest until late March.

Lawrence Stroll, Aston Martin’s new billionaire executive chairman after leading a £536m bailout in March, said he was “enthusiastic and confident” about the company, despite “some difficulties” in the short term.

The company is now focusing on reducing the number of cars held by dealers, as well as delivering its new DBX SUV, a car whose success is crucial for Aston Martin’s survival.

Aston Martin was the last of the large UK carmakers to pause production as the pandemic hit in March. It reopened its new St Athan plant in south Wales on 5 May in order to ramp up to full DBX production in “the next few weeks”. Deliveries to customers who have pre-ordered are on track to start in the summer.

However, the first-quarter figures revealed the strain the company was under before it agreed the bailout, with net debt rising to almost £1bn – 16 times higher than a year’s adjusted operating profitability.

Aston Martin will now only build cars to fulfill order demand, and it also suspended its financial guidance for the year.

Markets fall as Covid-19 fears mount

Over in the City, the FTSE 100 index of blue-chip shares has fallen by 1.3% in early trading, down 78 points to 5916 points.

Other European markets are also in the red, as investors fret about the risk of a second wave of Covid-19 infections as lockdowns are lifted.

Yesterday, a key member of the White House’s coronavirus task force warned that reopening the US economy too soon could lead to ‘really serious’ consequences.

Dr Anthony Fauci warned that ‘little spikes’ in infection could soon turn into fresh outbreaks, forcing lockdown measures to be reimposed.

Fauci told US senators that:


..there is a real risk that you will trigger an outbreak that you might not be able to control, which in fact, paradoxically, will set you back — not only leading to some suffering and death that could be avoided, but could even set you back on the road on trying to get economic recovery


Anthony Fauci: ‘serious consequences’ if US exits lockdown too early – video

Jing Teow, senior economist at PwC, says the outlook for the UK economy is also ‘highly uncertain’.


The government’s announcement that workers in the manufacturing and construction sector should return to work this week where safe, as well as opening the housing market, could mitigate some of the disruption to business activity in the current quarter.

However, this will depend on the effectiveness of current lockdown measures in preventing a second wave of infections, which may necessitate the reimposition of these measures later on in the year.”

Tej Parikh, chief economist at the Institute of Directors, isn’t convinced that Britain will ‘emerge stronger’ from the lockdown slump, as Rishi Sunak claims.

Parikh fears that activity levels among UK firms will remain depressed “for the foreseeable future”, given the challenge of obeying physical distancing rules:


“While countless companies have made adjustments with admirable speed, many will find it difficult to operate at anything like normal capacity under social distancing rules. The furlough scheme has undoubtedly staved off redundancies, and the new flexibility provides businesses a better chance of rebooting.

“The Treasury will need to continue innovating to kickstart any recovery. The Government’s loan scheme provided ready cash, but now leaves many firms saddled with debt. Unless this is managed well, it will drag on business investment for long after the lockdown ends.”

Sunak: We can get through this severe disruption

Chancellor Rishi Sunak says he’s not surprised that the UK economy shrank 2% in the last quarter.

Sunak blamed the economic damage caused by the Covid-19 pandemic, adding that his freshly-extended jobs retention scheme should help Britain get through the crisis.

He says (via Sky News):


In common with pretty much every other economy around the world we’re facing severe impact from the coronavirus. You’re seeing that in the numbers.

That’s why we’ve taken the unprecedented action that we have to support people’s jobs, their incomes and livelihoods at this time, and support businesses, so we can get through this period of severe disruption and emerge stronger on the other side.

SkyNews
(@SkyNews)

BREAKING: Chancellor Rishi Sunak says it is “no surprise” the UK economy shrank by 2% in the three months to the end of March, as the UK faces “severe impact” from the #coronavirus.

Read more on this story: https://t.co/HF2N5a8Xlv #GDP pic.twitter.com/JMza4alO22

May 13, 2020

Interactive: How lockdown stringency affects GDP

Many other countries suffered worse downturns than the UK in the last quarter, particularly in Europe.

And there’s a clear link between the tumble in GDP and the severity of the lockdown measures introduced to combat Covid-19.

France, Italy and Spain all moved before the UK, and consequently their economies shrank by more:

  • UK: -2%
  • US: -1.2%
  • Eurozone: -3.8%
  • France: -5.8%
  • Spain: -5.2%
  • Italy: -4.7%
  • China: -9.8%

This chart from the ONS plots GDP against a ‘stringency index’ – and there’s a clear correlation (there’s an interactive version here).

Growth vs lockdown stringency

Growth vs lockdown stringency Photograph: ONS

Updated

March slump shows more grim milestones ahead

This monthly chart of UK growth shows just how dramatically the economy shut down in March, with GDP shrinking by an uprecedented 5.8%.

UK monthly GDP

UK monthly GDP Photograph: ONS/Resolution Foundation

James Smith, research director at the Resolution Foundation, says there is a lot worst to come:


“The lockdown was only in place for seven working days in the first three months of the year. But it was still enough to bring about the biggest quarterly economic contraction since the peak of the financial crisis and the weakest single-month change on record.

“With the country in full or partial lockdown well into the second half of the year, the grim economic milestones hit in the latest data will be shattered next time around.

“Today’s figures serve as a reminder as to why a bold economic policy response has been needed. That approach will need to continue as Britain begins the long road out of this economic crisis.”

The UK economy wasn’t doing particularly well before the Covid-19 lockdown struck.

GDP did rise by 0.1% in January (when there was talk of a post-election ‘Boris Bounce’), but the economy then contracted by 0.2% in February – as the coronavirus pandemic began to hurt the global economy.

But as you can see, the real economy pain struck in March, when GDP shrank by 5.8% – and all sections of the UK economy suffering dramatic declines in activity:

UK GDP to Q1 2020

Photograph: Office for National Statistics

The economy was also flat in the last quarter of 2019.

Updated

March was particularly awful for these sectors of the UK economy:

  • education, which fell by 4.0% as a result of school closures at the end of March
  • wholesale and retail trade and repair of motor vehicles and motorcycles, which fell by 10.7%, predominantly driven by a reduction in new car registrations
  • food and beverage service activities, which fell by 7.3% as a result of the closure of bars and restaurants towards the end of March
  • accommodation, which fell by 14.6% as a result of the closure of hotels and campsites in March
  • travel agents, which fell by 23.6% as a result of reduced demand caused by the introduction of travel restrictions in March

Most manufacturing sectors also contracted — with transport equipment-making declining by 20.5% as car factories shut down.

But one sector defied the gloom — the manufacture of basic pharmaceuticals grew by 9.2% (presumably because people were stocking up on medicines and painkillers?)

Updated

Record fall in UK GDP in March

March was a particularly dire month for the economy – with GDP slumping by 5.8%.

It’s the worst performance since the ONS started calculating monthly data back in 1997 – so worst than in any single month during the financial crisis.

Rob Kent-Smith
(@Rob_KS_ONS)

Just out from @ONS : UK GDP falls by 2.0% in Q1 the biggest fall since financial crisis. GDP in month of March falls by 5.8%, the biggest fall since records began in 1997.

May 13, 2020

Jonathan Athow, deputy national statistician for economic statistics, explains:


“With the arrival of the pandemic nearly every aspect of the economy was hit in March, dragging growth to a record monthly fall.

“Services and construction saw record declines on the month with education, car sales and restaurants all falling substantially.

“Although very few industries saw growth, there were some that did including IT support and the manufacture of pharmaceuticals, soaps and cleaning products.

“The pandemic also hit trade globally, with UK imports and exports falling over the last couple of months, including a notable drop in imports from China.”

UK GDP Q1 2020

UK GDP Q1 2020 Photograph: Office for National Statistics

Britain’s services sector (which makes up around three-quarters of the economy) has suffered its biggest quarterly contraction on record.

The Office for National Statistics says:


In response to the coronavirus (COVID-19) pandemic, public health restrictions and social distancing measures have been put in place in the UK, leading to a widespread disruption to economic activity. These measures have impacted upon the spending behaviours of consumers as well as how businesses and their employees operate. It has also affected the provision of services provided by government, including health and education.

Services output decreased by 1.9% in Quarter 1 (January to March) 2020, the largest quarterly fall since records began. Production output fell by 2.1% in Quarter 1 2020, driven by declines in manufacturing. Construction output decreased by 2.6% in the first quarter.

The monthly figures corroborate that these estimates reflect the declines recorded in March 2020, when restrictions were imposed in response to the coronavirus.

UK GDP by sector

UK GDP by sector Photograph: ONS

This chart shows just how sharply the UK economy shrank in the first quarter:

UK quarterly GDP

UK quarterly GDP Photograph: Office for National Statistics

But this will, I fear, be dwarfed by the slump in growth in the current quarter.

UK economy shrinking: the key points

Here are the key points from today’s UK GDP growth report, showing how the economy shank in January-March:

  • UK gross domestic product (GDP) in volume terms was estimated to have fallen by 2.0% in Quarter 1 (Jan to Mar) 2020, the largest fall since Quarter 4 (Oct to Dec) 2008.
  • When compared with the same quarter a year ago, UK GDP decreased by 1.6% in Quarter 1 2020; the biggest fall since Quarter 4 2009, when it also fell by 1.6%.
  • This release captures the first direct effects of the coronavirus (COVID-19) pandemic, and the government measures taken to reduce transmission of the virus.
  • There has been a widespread disruption to economic activity, as services output fell by a record 1.9% in Quarter 1; there were also significant contractions in production and construction.
  • Household consumption fell by 1.7% in Quarter 1 2020, the largest contraction since Quarter 4 2008, alongside declines in gross fixed capital formation, government consumption and trade volumes.

Introduction: UK economy shrinks as Covid-19 slump begins

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

We start with some breaking news – the UK economy has suffered its worst contraction since the depths of the financial crisis, as the Covid-19 slump begins.

Britain’s Gross Domestic Product shrank by 2.0% in the first three months of 2020, new figures released by the Office for National Statistics show.

UK economy shrinks by 2% as Covid-19 slump begins 1Office for National Statistics (ONS)
(@ONS)

There was a 2.0% fall in UK GDP in Quarter 1 (Jan to March) 2020 https://t.co/SWbwgp79J8 pic.twitter.com/VS2Nzc3Rww

May 13, 2020

That’s the biggest quarterly drop in activity since the fourth quarter of 2008 – after the collapse of Lehman Brothers triggered the financial crisis.

In March alone, GDP contracted by 5.8% as the lockdown began, with shops and factory shutting their doors. All sectors of the economy were badly hit. The service sector shrank by 6.2% during March, while manufacturing output fell by 4.6% during the month and construction shrank by 5.9%.

Yesterday, chancellor Rishi Sunak warned that the UK recession was “already happening”, as he extended the jobs retention scheme until October. This data shows he was absolutely right.

And there is worst to come. Last week the Bank of England suggested that the UK economy might contract by 25% in the April-June quarter, creating the deepest recession in three centuries.

More details and reaction to follow.

The agenda

  • 7am BST: UK GDP report for Q1 2020, and for March
  • 10am BST: Eurozone industrial production data
  • 2pm BST: Federal Reserve chair Jerome Powell speaks at the Peterson Institute for International Economics

Updated

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