The UK has recently slipped into the deepest recession since records began, the worst of any of the G7 countries. Following a decline in growth of 2.2% in the first quarter of the year, the second quarter has seen a 20.4% contraction in the size of the UK economy. Therefore, alongside many other nations around the world, the UK has met the technical definition of a recession — two consecutive quarters of shrinking gross domestic product (GDP). This contraction has wiped out 17 years of growth in three months.
How the UK compares
The UK has seen both the biggest recession and the largest excess deaths out of all the G7 nations. Other countries have seen a decline, but none as severe: France contracted 13.8% in the second quarter, Italy 12.4%, Canada 12%, Germany 10.1%, US 9.5%, and Japan 7.6%.
One of the major reasons for these drastically different results is thought to be down to the UK government’s timing surrounding the pandemic. Countries such as Spain, Italy, and France locked down their economies more quickly, meaning they re-opened sooner and faced more of an economic hit in the first quarter. On the other hand, the UK government imposed a later lockdown, partly in an attempt to protect the economy, but in reality they have ended up achieving the worst of both worlds — having the highest excess death rate in Europe and the deepest recession. The later lockdown caused a surge in deaths compared to countries with more stringent measures in place. A surplus of deaths from the calamitously late lockdown helped destroy economic confidence and the virus spread dramatically. Germany had re-opened non-essential stores just 50 days from the start of their nationwide lockdown, yet this figure for England is 84 days, preventing the UK economy from recovering until around a month later than many European counterparts.
Another aspect hindering the UK’s economic recovery from the COVID-19 crisis is the general structure of the economy to begin with, a rather unlucky situation for the country. Britain is an economy greatly based around the service sector, with a large share of activity relying on face-to-face social interactions that are susceptible to social distancing. This can be demonstrated by the fact consumer spending in areas such as cinema, restaurants, hotels, and live entertainment accounts for 13% of the UK economy. The same figure for the US is only 11% and even lower for the Eurozone, at 10%, according to Goldman Sachs. This, combined with the greater fear factor surrounding COVID-19 in the UK relative to the populations of other countries will have massively affected the growth of the economy. Ministers fear this lack of confidence may have slowed the return to work as restrictions were gradually lifted in May and June, with businesses choosing to remain closed as they did not feel it was safe to open.
Some positive signs
As the UK economy returns to normal, albeit rather slowly, there are some more positive signs of growth, activity, and recovery being seen. There was a modest pick-up of growth in GDP of 2.4% in May and a more substantial 8.7% in June. It is expected there will be a further increase in national output in July and August, and, in all likelihood, we will see the biggest quarterly drop in activity on record being followed by the biggest quarterly rise on record. Temporary measures — the cuts in VAT and stamp duty, in particular- should bring forward spending and lead to faster growth in the coming months that otherwise would be the case. Schemes such as the Eat Out to Help Out scheme, are helping to fuel demand for industries that have suffered.
Despite this forcing the government to take part in huge amounts of borrowing, with UK public debt topping £2tn for the firm time, borrowing has never been cheaper. Such high demand for UK debt from investors has led to government bonds being sold at negative interest rates, meaning investors are paying the British government to take their money. This is owing to the fact that there are fewer safer havens than UK bonds; unlike Eurozone countries, Britain has its own currency and the ultimate magic money tree — the Bank of England. Therefore, there is no need for the government to deny essential support for living standards and public services when borrowing is so cheap. By far the greatest stimulus any government can provide is an effective strategy to prevent the spread of COVID-19, as the confidence of the nation is a critical factor in economic recovery.
Still some way to go
Even though some positive signs are being seen, it would be reckless for the government to assume the UK will enjoy a “V-shaped recovery”. GDP still remains 17.2% smaller than it was in February and a second wave is looming. Economists have warned the pick-up in activity in May and June was predominantly driven by the release of pent-up demand and growth could falter over the coming months. The faltering in growth may be owing, to a large extent, to the ending of the furlough scheme while areas of the country are going back into lockdown. This move threatens the possibility of the jobless rate rising to levels not seen since the 1980s by Christmas, something that would cause a further lack of confidence and more problems for the government.
It is suggested it is down to the government to continue large levels of spending to keep the economy stimulated until the crisis is over. There are calls from the Left arguing for investment in jobs, public ownership, and democratisation. As John Maynard Keynes was fond of remarking, “look after the unemployment, and the budget will look after itself” — the government will face some tough choices relating to spending in the months ahead. The UK economy’s overall performance for 2020 as a whole will not be confirmed until early next year; the Bank of England expects an annual fall of 9.5%, which would mark the deepest annual slump since the period following the First World War.