The initial hit to the UK from the coronavirus crisis is “striking” as economic activity contracts by levels last seen during the global financial crisis, fuelling concerns that output will struggle to return to pre-crisis norms.
Data from the Office for National Statistics showed the UK economy contracted by 2.0% in Q1, its biggest quarterly drop since Q4 2008.
The decline largely reflects a 5.8% fall in output in March, driven by monthly declines across the UK production, construction and services industries.
Melanie Baker, senior economist at Royal London Asset Management, said the damage from one week of economic lockdown is “striking”. “Activity growth in April will be much worse,” she said.
March figures better reflect reality
Since lockdown in the UK didn’t begin until mid-March, the GDP figures only provide a small glimpse of the damage from Covid-19 and thus “is equivalent to driving with the rear-view mirror,” said Interactive Invetor head of markets, Richard Hunter.
“The March part of the number better reflects reality,” said Hunter, “with the second quarter likely to bear the economic brunt of the pandemic while also confirming the inevitable recession which is almost certainly already in play in the UK.”
“Markets are now putting any last hopes of a v-shaped recovery to rest,” said Invesco head of multi asset David Millar.
“On a country by country and global basis economists are now grappling with the difference between two huge numbers: the holes left by the six week+ lockdowns in economies that are only starting to loosen; and the unprecedented monetary and fiscal stimulus that the central banks and governments are pouring into those holes to try and replace the activity that has been lost,” said Millar.
UK services suffers widespread slump
Output from the UK services industry slumped by 1.9% in the first quarter, driven by a 6.2% monthly decline in March as public health restrictions and social distancing measures led to a widespread disruption of economic activity.
The vast majority of service industries suffered declines, with education, wholesale and retail trade, auto repairs, food and beverage, accommodation and travel agencies among the worst affected sectors.
There were a handful of outliers, including the computer programming industry which showed growth during the period.
Production and construction also suffered “significant contractions,” the ONS report said, wit output falling by 2.1% and 2.6% over the quarter and 4.2% and 4.6% in March alone.
Manufacturing output was down 1.7% in Q1. While there were big falls in manufacturing of transport equipment (-9.9%) due to factory shutdowns, demand for pharmaceutical products increased 9.2%, while the manufacture of paper products as well as meat and grain products also rose as UK consumers began stockpiling and panic buying.
Activity levels will struggle to return to pre-crisis norms
While the Covid hit to the UK economy is expected to be even more severe in Q2, commentators remain split on how quickly markets will be able to rebound as lockdown restrictions are eased.
“If we had four quarters like this then the UK would be in a dire situation, but thankfully the expectation is that the economy will quickly bounce back once lockdown is over,” said 7IM senior investment strategist Ben Kumar.
“As social distancing is eased, we will probably see a strong initial bounce in activity,” Baker said. “However, there isn’t a straightforward trade-off between social distancing and activity,” she added.
“Until businesses and households are confident that the virus poses little danger to lives and livelihoods, the recovery is likely to lag and activity levels will struggle to return to pre-crisis norms.”
The Share Centre investment research analyst Helal Miah notes that although markets have bounced back from the trough of the coronavirus sell-off in late March “there seems to be little impetus even though governments and central banks are giving it their all”.
“The economic data, corporate results and failure rates will get worse as we go along and stock markets will begin to reflect that, while current market p/e rate for the FTSE All Share of around 15.5x is too high. Earnings are being revised lower, so the ‘p’ bit of the equation will need to go lower too.”
