UK Economy Update (August 2020): Deepest Recession on Record

Six months on from the start of lockdown, this update video looks at data showing the depth of the recession affecting the UK economy.

It will come as no surprise, but official data now shows the depth of the recession that has afflicted the UK economy in the first six months of the year.

Between April and June 2020 (the second quarter), the level of real GDP - a measure of output and spending on goods and services and the income we earn from producing them - fell by 20.4%.

There was an estimated rebound of 8.7% recorded in June which suggests that output is recovering as the economy gradually reopens following lockdown.

Without question this is one of the deepest downturns in national output in modern times

There is also significant variability in the data. Output in pharmaceuticals in quarter 2 is up 22.6% whereas air transport is down 96.2% after a collapse in passenger numbers and a steep contraction in air cargo freight. Accommodation and food services were down 86% in the second quarter and output in the car industry contracted by 63 per cent.

Only Spain among OECD countries has seen a larger contraction in real GDP.

There are many reasons being offered as to why the UK might have been so badly impacted relative to other advanced high-income countries. One is that social spending - i.e. the £s we spend on going to the cinema, having a meal out or taking a holiday - accounts for a larger percentage of consumer spending which itself is a very high percentage of aggregate demand. Private consumption accounted for more than 70% of the fall in the expenditure measure of GDP in Quarter 2 2020.

The fear is that this historic drop in output will - with a time lag - lead to a severe decline in employment leading in turn to a surge in registered unemployment. The Bank of England is forecasting an unemployment rate of 7.5% of the labour force by the end of 2020.

Interviewed recently, Chancellor Rishi Sunak was quoted as saying, “"Hundreds of thousands of people have already lost their jobs, and sadly in the coming months many more will." The process will be accelerated by the planned withdrawal of the job renting (furlough) scheme which has involved the UK government subsidising the wages of millions of workers.

Employment has contracted sharply. In July 2020, 730,000 fewer people were in paid employment when compared with March 2020. The heaviest job losses were reported by airline carriers, holiday operators, non-food retailers, automotive manufacturers, and firms along aerospace supply chains

Of those who still have a job, data shows the largest quarterly decrease in total actual weekly hours worked since records began in 1971

Redundancies are starting to rise now but the furlough scheme has helped to limit this change during lockdown

The claimant count measure of unemployment has more than doubled since March 2020 - UK Claimant Count level increased by 116.8% since March 2020. The number of people claiming unemployment related benefits has increased by 1.4 million since March 2020 when the lockdown began

With business expectations low and many companies issuing profits warnings and announcing redundancies, one would also expect planned capital investment to be falling. This is confirmed by data which shows that gross capital investment spending fell by 37% in the second quarter.

The collapse in national output was inevitable given the decision to lockdown large swathes of the economy to help protect public health. There are many uncertainties about the speed and resilience of any recovery in the months and quarters to come, and the extent to which a further round of fiscal and monetary stimulus policies will be needed to support incomes, demand and jobs.

A recession of this depth will almost certainly lead to some economic scarring effects especially among younger people who work in most badly affected by the pandemic. Older workers aged 65 or over have been particularly impacted by the fall in employment. Workers who are from a BAME (Black, Asian, Minority Ethnic) background have also been most negatively economically impacted by the coronavirus outbreak and those in work many working in key public sector services have also been at higher risk of exposure to the virus.