UK in recession as GDP slumps in second quarter

The UK has officially fallen into recession after the latest GDP figures from the Office for National Statistics (ONS) revealed the economy suffered its biggest fall on record during the second quarter.

Estimates indicated that the UK GDP slumped by 20.4% between April and June, the second consecutive quarterly decline after it fell by 2.2% in the first quarter of 2020, when the country entered lockdown.

The ONS stated that the magnitude of the economy’s contraction in response to the COVID-19 pandemic has left the UK in its largest recession on record, highlighting that the economy is now 22.1% smaller than it was at the end of 2019.

The decline in the second quarter was driven by a 20.0% fall in April alone – the biggest monthly fall on record – which the ONS suggested reflects widespread monthly declines in output across the country’s services, production, and construction industries.

“A drastic fall in output for the second quarter was to be expected given the restrictions that remained in place throughout those three months,” Killik & Co associate investment director, Rachel Winter, commented.

“The UK derives about four-fifths of its GDP from the services sector, which includes many types of businesses that have been unable to operate during lockdown. Examples include retail, hotels, restaurants, and live events. Our dependence on the services industry is one reason why our fall in output has been relatively severe compared to other major European economies.”

Fidelity International investment director, Tom Stevenson, added: “The scale of the contraction compared with comparable countries is a concern, although it does reflect the length of time during the quarter that the UK was in lockdown.

“Expectations from the Bank of England that the economic fallout from the pandemic would be short-lived, or V-shaped, are borne out by the sharp fall and rapid partial recovery but UK GDP has seen the biggest quarterly drop of any G7 economy.

“No one knows exactly what the recovery from coronavirus will look like – particularly with the potential for a second wave of infections and further local lockdowns – but it is likely that it will be a slow crawl towards pre-Covid levels with further government stimulus needed to restore sustained growth.”

Despite the dramatic quarterly fall in GDP, the data from the ONS also showed there was a rebound in June, with figures showing the UK GDP increased on a monthly basis by 8.7%.

The ONS highlighted that there had been a phased easing of lockdown restrictions across the UK through May and June, which included the reopening of non-essential shops.

“The figure for June is key, as we all knew that lockdown measures would have a big impact on the economy, but what we still don’t know is how quickly the UK will rebound,” said AJ Bell personal finance analyst, Laura Suter.

“Figures showing GDP growth of 8.7% in June are encouraging – albeit this is coming from a very low base after the falls in May, and still sits far below the pre-Covid figures from February. But July figures are expected to be more positive still, as more businesses reopened and people emerged from their houses to start spending.

“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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