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