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UK economy shrinks by record 20.4% in April as lockdown hits all areas

It was the UK's worst monthly performance since records began

UK

Britain’s economy shrank by 20.4% in April as the full impact of the coronavirus (COVID-19) lockdown was felt across the country.

It was the UK's worst monthly performance since records began, according to the Office of National Statistics.

"April's fall in GDP is the biggest the UK has ever seen, more than three times larger than last month and almost 10 times larger than the steepest pre-COVID-19 fall," said Jonathan Athow, deputy national statistician for economic statistics at the ONS,

"In April, the economy was around 25% smaller than in February," he added.

Athow concluded: "Virtually all areas of the economy were hit, with pubs, education, health and car sales all giving the biggest contributions to this historic fall."

Economists had predicted a 19% drop ahead of the figures but the actual outturn surpassed even those gloomy forecasts. The fall was three times more than the UK’s entire downturn following the 2009 financial crash. 

“Output in some sectors — such as retail — initially was supported by stockpiling in March, before slumping severely in April," according to Pantheon Macroeconomics.

“In addition, many construction sites initially remained open in late March — regulations never forced them to close — before shutting completely in April. And the slump in manufacturing output likely deepened as more time elapsed, due to component shortages and depleted work backlogs,” the Pantheon analysts noted.

"Short, sharp shock"

Assessing the slowdown, Hargreaves Lansdown’s head of investment analysis, Emma Wall, said the economy had had a “short, sharp shock”, but the more important consideration was what shape the recovery would take for the UK economy.

“A so-called ‘V-shaped’ recovery is a period in which the economy experiences a sharp dip followed by a sharp upward rise, as the shape of the letter suggests. An ‘L-shaped’ recovery is a sharp dip but a slower and steadier increase upwards over time, like the shape of an `L’ slightly tilted. Ultimately, what happens after the furlough scheme has ended will impact which shape the recovery will take”, Wall said.

The analyst added that the UK should keep an eye on countries that are further along in the pandemic cycle, particularly in Asia, which if they saw successful lifting of lockdown measures could “Boost stock market sentiment and provide hope for the domestic economic outlook”.

However, Edison Group investment strategist Alastair George warned that the central banks “have almost been too effective in supporting markets, masking the economic cost of lockdowns as well as dimming employment and training prospects for younger people less at risk from [coronavirus]”.

“These will be important figures to frame the debate on the government’s lockdown policy for the remainder of the year”, he said.

Second wave and Brexit key risks

Looking forward, analysts at Berenberg said that for all advanced economies the “key risk to the outlook remains a potential second wave of the virus that requires nationwide lockdowns to contain it”.

Learning to live with the virus will remain a major challenge until better medicine becomes available”, Berenberg said, adding that the UK faced an additional risk from its ongoing negotiations with the EU about their post-Brexit trading relationship.

“Negotiators seem to be stuck at an impasse and are far apart on key issues such as governance, level-playing-field rules, fishing and, critically, the Northern Irish border. On top of the huge economic and reputational damage from the badly handled pandemic, the tail-risk of disorderly exit from the single market presents an additional threat to the UK”, they said.

--Adds analyst comments--

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