The worst may be over but Bri­tain will be scarred for years to come

The Daily Telegraph - Business - - Coronaviru­s: Focus On The Economy - Tom rees

The UK was de­clared the “sick man of Europe” by economists after a sec­ond-quar­ter plunge in GDP big­ger than any­where else. There were un­prece­dented col­lapses across al­most every sec­tor, but some in­dus­tries bore more of the brunt of the pan­demic than oth­ers.

Wage help for house­holds

The un­prece­dented hit to the economy was borne largely by busi­nesses rather than house­holds, but in­comes could soon start to slide.

The Chan­cel­lor’s wage sub­sidy schemes for em­ploy­ees and the self-em­ployed meant Bri­tons’ pay slipped just 2.2pc in the sec­ond quar­ter, as a third of the pri­vate sec­tor work­force was put on fur­lough. How­ever, com­pany prof­its plunged by 24pc.

The pres­sure on house­hold in­comes could build as the fur­lough scheme is wound down and job losses pile up.

Ser­vices drives slump

The record col­lapse in GDP was driven by its largest sec­tor see­ing one fifth wiped off its out­put in a quar­ter. The ser­vices sec­tor ac­counts for about 80pc of the economy, a larger share than many other ad­vanced economies, and drove the 20pc drop in GDP dur­ing the sec­ond quar­ter.

The re­liance on ser­vices has made the UK more vul­ner­a­ble than most to the Covid shock as swathes of busi­nesses were forced to close. The falls in out­put in the ser­vices, in­dus­trial and con­struc­tion sec­tors dur­ing the sec­ond quar­ter all broke records, but the monthly data sug­gest the economy’s re­cov­ery be­gan in May and gath­ered pace in June.

Restau­rants and ho­tels hit hard­est but re­cov­ery be­gins

The economy was pun­ished by its de­pen­dence on “so­cial con­sump­tion”; spend­ing on ac­tiv­i­ties that in­volve in­ter­ac­tion with other peo­ple, such as restau­rants, or foot­ball matches.

Restau­rants and ho­tels suf­fered most in the ser­vices in­dus­try, with ac­com­mo­da­tion and food see­ing an 87pc out­put plunge in the three months to June. How­ever, the sec­tor will bounce back sharply in July after re­stric­tions were lifted last month.

Fac­tory shut­downs trig­ger pro­duc­tion drop

Only the phar­ma­ceu­ti­cal in­dus­try saw pro­duc­tion growth dur­ing a woe­ful first half of the year after de­mand was boosted by the health cri­sis.

Fac­tory shut­downs trig­gered a 17pc plunge in pro­duc­tion in the three months to June. Man­u­fac­tur­ers of trans­port equip­ment (which in­cludes cars), ma­chin­ery and me­tal prod­ucts con­trib­uted most to a fifth con­sec­u­tive quar­terly de­cline, the ONS re­vealed.

“Many manufactur­ing plants (no­tably in the car sec­tor) and con­struc­tion sites were closed through­out April be­fore start­ing to re­open from May,” ex­plains Howard Archer, econ­o­mist at EY Item Club.

The con­struc­tion in­dus­try suf­fered the big­gest drop in out­put of the three big­gest sec­tors, plung­ing 35pc in the sec­ond quar­ter.

Big­gest trade sur­plus ever, but for the wrong rea­sons

The UK recorded its largest trade sur­plus on record dur­ing the sec­ond quar­ter, but it was only driven by im­ports plung­ing more than ex­ports.

Im­ports slid by £35.2bn as de­mand tum­bled, while ex­ports fell £26.7bn. Ex­porters of fu­els, ma­chin­ery and ve­hi­cles saw the big­gest falls in goods sent overseas as de­mand dwin­dled.

Long lock­down takes toll

That all added up to the UK economy be­ing one of the worst af­fected by the pan­demic in the world. A toxic

‘Ris­ing unem­ploy­ment is prob­a­bly the big­gest threat to the re­cov­ery linked to the un­wind­ing of fur­lough’

com­bi­na­tion of a long lock­down, a ser­vices-driven economy and plum­met­ing global de­mand trig­gered a stag­ger­ing col­lapse in GDP that was only matched by Spain.

While the UK took the crown for the big­gest sec­ond-quar­ter slump, Spain’s se­vere lock­down and tourism woes mean it en­dured a marginally worse first half of 2020. Span­ish out­put sank 22.7pc com­pared to the UK’s 22.1pc fall.

How­ever, Bri­tain’s economy suf­fered far heav­ier dam­age than France, Italy, Ger­many and the US de­spite head­ing into lock­down later. More im­por­tant now will be the speed and strength of the re­cov­er­ies but economists are brac­ing for a slow re­bound in the UK stretch­ing into sev­eral years as scar­ring deep­ens.

De­spite a sharp bounce in June’s monthly GDP data, James Smith, econ­o­mist at ING, warns it will “take at least an­other two-to-three years for the economy to re­gain all the lost ground.

“Ris­ing unem­ploy­ment is prob­a­bly the big­gest threat to the re­cov­ery at the mo­ment, and this is be­ing linked to the grad­ual un­wind­ing of the Gov­ern­ment’s fur­lough scheme.”

Even if the worst of the Covid hit to GDP has now passed, the economy is likely to suf­fer for years to come.

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