UK suffers biggest drop in economic output in 300 years

1

UK economic output declined 9.9 per cent in 2020, the largest drop in 300 years and more than twice the fall during the financial crisis, laying bare the scale of the pandemic’s impact.

Growth was higher than expected in the fourth quarter despite extensive Covid-19 restrictions but was smaller than before the pandemic, while the lockdown since January presages another downturn in 2021.

Output expanded 1 per cent in the three months to December from the previous quarter, according to data from the Office for National Statistics — a stronger showing than the 0.5 per cent forecast by economists polled by Reuters.

But the figures released on Friday showed UK output down 7.8 per cent from the final quarter of 2019, twice the decline in Germany and three times the US drop.

The 9.9 per cent fall for 2020 was the biggest since the great frost of 1709 and eclipsed the 9.7 per cent contraction of 1921, when economies were battered by the post-first world war downturn, according to historical data from the Bank of England.

Line chart of Annual % change showing UK economy suffers biggest contraction in three centuries

The figures increase the pressure on chancellor Rishi Sunak to add or extend measures to support the economy in his Budget on March 3.

He said on Friday: “Today’s figures show that the economy has experienced a serious shock as a result of the pandemic, which has been felt by countries around the world.

“While there are some positive signs of the economy’s resilience over the winter, we know that the current lockdown continues to have a significant impact on many people and businesses.”

The UK’s relatively poor economic performance is coupled with it registering more Covid-19 deaths per million population than any other major economy and suffering the highest death toll in Europe.

The BoE expects a further economic contraction in the first quarter caused by the latest lockdown. But the UK’s relatively swift vaccine rollout has raised hopes of recovery from the spring.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “We look for a hefty 6 per cent quarter-on-quarter rebound in GDP in the second quarter, followed by a 2.2 per cent increase in the third.” That could mean a “faster recovery than in other European countries, where the vaccine rollout has been much slower”, he added.

Government support schemes have helped to protect jobs and incomes of most households. The unemployment rate edged up to 5 per cent in the three months to November, below the 7.6 per cent expected for 2020 in May in forecasts averaged by Consensus Economics.

The UK’s relatively poor economic performance is in part a result of the longer lockdown lengths as well as the less generous stimulus plans and tax cuts than peer countries.

The UK was also hit harder by the drop in social consumption, such as eating out, leisure and cultural activities. This accounted for about a fifth of UK household spending before the pandemic, the highest proportion among G7 countries.

Faced with the double challenges of Brexit uncertainty and the pandemic, UK business investment fell 11 per cent in 2020, almost four times the percentage drop in the US.

Line chart of Index, rebased showing UK business investment lags behind the UK

However, different methodologies are unfavourable to the UK. It counts public sector output using indicators such as the number of hospital operations, GP appointments and pupils attending school, which shrank due to the lockdowns.

Most other countries measure such output by how much is spent on them, which has changed little since teachers and health workers continue to be paid.

When measured in these nominal terms, the UK fall in GDP is broadly comparable with other G7 countries. However, Rob Kent-Smith, head of GDP at the ONS, said even excluding public services the decline up to the third quarter of 2020 was “still one of the largest in the G7”.

Column chart of Q4 2020, annual % change showing Countries use different methods to calculate GDP

The ONS also reported a widening goods trade deficit in the last three months of 2020, driven by rising EU imports as businesses prepared for the end of the transition period.

In December, the economy expanded 1.2 per cent compared with the previous month. Although November’s figure was revised up 0.3 percentage points, the economy shrank 2.3 per cent that month as England entered lockdown.

Line chart of Index, 2018=100 showing UK GDP remains well below pre-crisis levels

“Loosening of restrictions in many parts of the UK saw elements of the economy recover some lost ground in December, with hospitality, car sales and hairdressers all seeing growth,” said Jonathan Athow, deputy national statistician for economic statistics.

Services rebounded strongest, rising 1.7 per cent in December compared with November. The manufacturing sector grew for the eighth consecutive month, but output in the construction sector fell for the first time since the spring.

Jonathan Gillham, PwC chief economist, said: “These figures are much less worse than expected and show that, from an economic perspective, we are becoming more adaptable to being locked down.”

View original post