Press release

13 May 2020 London, GB

UK economy contracts 2.0% quarter-on-quarter in Q1 2020 amid increasing restrictions

The UK economy took a significant downward turn in March with record monthly GDP contraction of 5.8% month-on-month. GDP contracted 2.0% quarter-on-quarter in the first quarter, the largest decline since the fourth quarter of 2008.

Press contact

Annabel Banks

EY UK&I Media Relations Manager

A highly experienced communications professional with cross-sector experience in media relations having worked with global brands spanning elite professional services firms to digital start-ups.

Related topics Growth
  • The UK economy took a significant downward turn in March with record monthly GDP contraction of 5.8% month-on-month.
  • The services sector was particularly impacted by the lockdown restrictions in March – output in the sector fell 6.2% month-on-month.
  • No sector was spared on the output side of the economy as there were also substantial month-on-month falls in construction output (5.9%) and industrial production (4.2%), including a drop of 4.6% in manufacturing output.
  • GDP contracted 2.0% quarter-on-quarter in the first quarter, the largest decline since the fourth quarter of 2008.
  • On the output side of the economy, all sectors saw a substantial quarter-on-quarter contraction: services (1.9%), industrial production (2.1%) with manufacturing output declining (1.7%) and construction (2.6%).
  • On the expenditure side of the economy, consumer spending (down 1.7% quarter-on-quarter) was impacted by the restrictions on activity, weakened consumer fundamentals and falling confidence. There was a marked negative contribution from net trade as exports sank 10.8% quarter-on-quarter while lower stocks also had a negative effect. Government spending fell markedly (down 2.6% q/q) but business investment was surprisingly flat.
  • The EY ITEM Club is downgrading its UK GDP forecast tor 2020 to contraction of 7.5% from an anticipated 6.8% drop. GDP is now expected to contract around 15% quarter-on-quarter in the second quarter rather than by 13% quarter-on-quarter. First quarter contraction of 2.0% quarter-on-quarter was slightly more than the 1.8% drop EY ITEM Club had pencilled in, although it was below the consensus decline of 2.5% (the Bank of England had estimated 3.0%).
  • April undoubtedly saw a worse performance than March due to the lockdown restrictions throughout the month.
  • On the assumption that the Government gradually eases restrictions further over the coming weeks and more so in the third quarter, we expect the economy to start recovering in the third quarter.
  • The EY ITEM Club expects the economy to grow 5.5% in 2021 as supportive monetary and fiscal policy helps recovery from the substantial but short-term coronavirus impact to activity in the first half of 2020. However, the upside for growth is likely to be limited by unemployment taking its time to come back down. Indeed, EY ITEM Club predicts that the economy is unlikely to return to its size of the fourth quarter of 2019 until the first quarter of 2023.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

UK GDP contracted 2.0% quarter-on-quarter in the first quarter of 2020 according to a preliminary estimate from the Office for National Statistics. This was the sharpest contraction since the fourth quarter of 2008 and followed a flat performance in the fourth quarter of 2019. GDP was down 1.6% year-on-year in the first quarter of 2020, having been 1.1% higher in the fourth quarter of 2019.

The first quarter contraction in GDP was almost entirely due to the economy being severely impacted in March by the coronavirus-combating restrictions which culminated in the lockdown on 23 March. Specifically, GDP contracted a record 5.8% month-on-month in March causing it to be down 5.7% year-on-year. GDP had previously been disappointingly lacklustre at the start of 2020, despite increased consumer and business confidence after December’s election, edging down 0.2% month-on-month in February after a rise of 0.2% in January.

The services sector was particularly affected by the restrictions in March as many consumer-facing activities were shut down. Output in the sector fell 6.2% month-on-month with widespread weakness. Significantly, no sector was spared on the output side of the economy as there were also substantial month-on-month falls in construction output (5.9%) and industrial production (4.2%) including a drop of 4.6% in manufacturing output.

Consumer spending fell sharply in first quarter and net trade was substantially negative; business investment was flat

On the expenditure side of the economy, a substantial drop in consumer spending and negative net trade were the key factors behind the sharp GDP contraction. There was also a negative impact from lower stocks.

Specifically, consumer spending declined 1.7% quarter-on-quarter in the first quarter and was down 1.0% year-on-year. It was particularly impacted in March by the restrictions on activity, sharply weakening consumer fundamentals and falling confidence. Non-essential retailers were shut following the lockdown on 23 March while some parts of the consumer services sector were effectively brought to a halt by the lockdown. Meanwhile, many people lost their jobs in March, despite the supportive Government measures and many incomes were hit.

Overall investment fell 1.0% quarter-on-quarter in the first quarter. Business investment was somewhat surprisingly flat, despite the impact of COVID-19 on economic activity and uncertainties mounting. There was contraction of 1.9% quarter-on-quarter in government investment and 6.0% in private dwellings investment.

Government spending fell 2.6% quarter-on-quarter and was down 0.1% year-on-year.

There was a significant negative impact from lower inventories. This was led by a fall in stocks being held by the retail and wholesale trades.

Net trade made a marked negative contribution to first quarter GDP. Exports sank 10.8% quarter-on-quarter as global trade weakened substantially as coronavirus impacted widely. Imports contracted 5.3%.

All output sectors suffered marked contraction in first quarter

On the output side of the economy, there was a widespread marked contraction in the first quarter.

Output in the dominant services sector fell a record 1.9% quarter-on-quarter in the first quarter as it was particularly impacted by the lockdown closures on 23 March. The weakness in services activity was widespread.

Industrial production contracted 2.1% quarter-on-quarter with manufacturing output declining 1.7% quarter-on-quarter. In addition, construction output fell 2.6% quarter-on-quarter.

Outlook

We now expect GDP contraction of 7.5% in 2020, rather than 6.8%. GDP is forecast to contract by around 15% quarter-on-quarter in the second quarter rather than by some 13% quarter-on-quarter. First quarter contraction of 2.0% quarter-on-quarter was slightly more than the 1.8% drop we had pencilled in, although it was below the consensus decline of 2.5% (the Bank of England had estimated 3.0%).

Our second quarter forecast of around a 15% quarter-on-quarter contraction assumes that, following the very modest easing of restrictions by the government on 11 May, further gradual easing occurs over the coming weeks.

The substantial fiscal and monetary stimulus that has been enacted should provide serious support to activity once the coronavirus impact starts to wane, while consumer purchasing power should benefit from very low inflation. There should also be a fair degree of pent-up demand following a collapse in consumer spending in Q2 2012 due to the lockdown. We assume that the Government’s measures aimed at supporting businesses and saving jobs will have a significant positive impact. This is absolutely crucial to limiting the potential longer-term damage to the economy and enabling a decent recovery to get underway in the latter months of 2020.

Nevertheless, unemployment is expected to have risen markedly and this will have some limiting impact on the recovery. Global economic activity should also be markedly stronger later on in 2020 and during 2021 as other economies recover from the coronavirus. Consequently, the EY ITEM Club believes the UK economy could grow by 5.5% in 2021 after the expected contraction of 7.5% in 2020.

Potential downside risks to the outlook include coronavirus affects the economy longer than expected or continued consumer and business caution even after the Government relaxes the restrictions on activity.

A more fundamental and particularly worrying downside risk is that the economy suffers severe near-term damage in terms of companies going under and jobs lost, despite the Government’s measures aimed at helping businesses to keep going and retaining workers, and if this holds back the subsequent recovery.