- Revised and rebased national accounts data from the Office for National Statistics (ONS) show the UK economy experienced a record contraction in Q2 (19.8% quarter-on-quarter) after a significant contraction in Q1 (2.5%) as lockdown restrictions had a major impact on activity. These declines in GDP had previously been reported at 20.4% q/q in Q2 and 2.2% q/q in Q1
- GDP in Q2 was 21.8% below the Q4 2019 level
- All output sectors saw quarter-on-quarter contraction over Q2: services (19.2%), industrial production (16.3%), manufacturing output (21.1%), and construction (35.7%)
- On the expenditure side, falls in consumer spending (down a record 23.6% quarter-on-quarter) and business investment (26.5%) were drags on the economy. Lower stocks also had a negative effect. Positive contributions came from government investment (up 19.3% quarter-on-quarter) and net trade, but only because imports (down 22.7%) fell more than exports (down 11.0%)
- A particularly notable feature of Q2 saw the household savings ratio rise to a record high of 29.1% from 9.6% in Q1. This was the consequence of spending falling at a faster rate than income
- The economy clearly enjoyed a substantial bounce back in Q3, led by consumer spending amid substantially reduced COVID-19 restrictions. The EY ITEM Club suspects GDP growth was at least 15% quarter-on-quarter in Q3, and it could have been up around 17% quarter-on-quarter
- However, the EY ITEM Club believes that Q4 will be more challenging for the UK economy and growth may be limited. This will be due to a likely significant rise in unemployment, the waning of pent-up demand, and increased restrictions on activity due to rising COVID-19 cases
- Additionally, business caution and reluctance to invest in Q4 may be magnified by uncertainties over the future UK-EU trading relationship. There may, however, be some boost to growth in Q4 from significant stockbuilding ahead of the 31 December deadline for EU-UK talks
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The release of a revised and rebased set of national accounts by the ONS shows some modest changes to the UK GDP performance, but does not fundamentally change the picture of the economy. The economy experienced a record contraction over the second quarter after a marked dip in the first quarter.
“UK GDP contracted a record 19.8% quarter-on-quarter and 21.5% year-on-year in the second quarter, primarily due to the record fall in activity in April when lockdown restrictions were fully in place. With the economy earlier contracting 2.5% quarter-on-quarter in the first quarter (which, at the time, had been the fastest decline since the third quarter of 1979), the economy moved into recession over the first half of the year. Indeed, GDP in the second quarter was 21.8% below the level seen in the fourth quarter of 2019.
“After April’s decline of 19.5% month-on-month, GDP grew 2.7% month-on-month in May when there was a modest first easing of the lockdown restrictions. The economy took a significant step forward in June when GDP expanded 9.1% month-on-month amid a further easing of lockdown restrictions. This included non-essential retailers being allowed to open from the middle of the month.”
All output sectors saw significant contraction in Q2
Howard Archer continues: “There was a substantial quarter-on-quarter contraction across all output sectors in the second quarter. Output in the dominant services sector fell a record 19.2% quarter-on-quarter following a fall of 2.6% quarter-on-quarter in the first quarter. The most notable declines occurred in the accommodation and food services sectors, wholesale and retail trade and repair of motor vehicles, human health and social work activities, and education as they were affected by “business closures, shutdowns among clients or shrinking survey record low sales due to a slump in non-essential spending.””
Howard Archer adds: “Industrial production contracted 16.3% quarter-on-quarter with manufacturing output declining 21.1% quarter-on-quarter. This followed respective declines of 2.1% quarter-on-quarter and 1.8% quarter-on-quarter in the first quarter. Manufacturing output was particularly affected by a 49.1% fall in the manufacture of transport equipment due to widespread factory shutdowns during the lockdown period.
“Construction output fell 35.7% quarter-on-quarter in the second quarter after a decline of 2.8% quarter-on-quarter in the first quarter. Private new house work fell by 49.5%.
“Many manufacturing plants (notably in the car sector) and construction sites were closed throughout April before starting to re-open from May.”
Record falls in consumer spending and business investment significantly affected Q2 performance
Howard Archer continues: “On the expenditure side of the economy, record falls in consumer spending and business investment weighed on the second quarter figures, while there were also negative contributions from government spending and stocks. The only positive contributions came from government investment, as a consequence of efforts to support the economy, and from net trade, but only because imports fell more than exports.
“Consumer spending declined 23.6% quarter-on-quarter in the second quarter and was down 26.2% year-on-year as it was affected by the restrictions on activity (particularly in April), weaker consumer fundamentals and weakened confidence. This followed a fall of 3.0% quarter-on-quarter in the first quarter. Non-essential retailers were shut from 23 March through to mid-June while some parts of the consumer services sector were effectively brought to a halt for much of the second quarter by the lockdown including the closure of theatres, cinemas, gyms, restaurants, pubs, and clubs. Meanwhile, some companies made redundancies and incomes were affected during the quarter, despite the supportive government measures.
“A notable feature of the first quarter was that the household savings ratio increased to a record 29.1% from 9.6% in the first quarter. That provides some welcome support to consumers, although analysis indicates that it was the least well-off who have tended to find their finances increasingly squeezed during the second quarter as jobs and incomes were negatively affected.
“Overall investment fell 21.6% quarter-on-quarter in the second quarter after a fall of 1.0% in the first quarter. Business investment fell 26.5% quarter-on-quarter in the second quarter after a decline of 0.5% quarter-on-quarter in the first quarter as companies faced reduced activity, weakened cash flows and uncertainties. There was contraction of 41.5% quarter-on-quarter in private dwellings investment in the second quarter. However, government investment rose 19.3% quarter-on-quarter.
“Government spending fell 14.6% quarter-on-quarter and 16.9% year-on-year. This followed a fall of 3.9% quarter-on-quarter in the first quarter which reflected lower spending on health and education.
“There was a negative impact from lower inventories as stocks held by UK companies fell by £4.0 billion over the second quarter. This was led by a fall in the level of stocks held within the wholesale and retail trades, though partially offset by increases in stock levels held in mining and quarrying, which increased as a result of falling oil prices.
“Net trade made a major positive contribution to second quarter GDP, but only because imports declined faster than exports. Net trade had made a considerable negative contribution in the first quarter. Exports fell 11.0% quarter-on-quarter in the second quarter as most countries experienced contraction and global trade weakened; this followed a decline of 10.7% in the first quarter. Imports contracted 22.7% quarter-on-quarter in the second quarter, reflecting the weakness of UK domestic demand; this followed a decline of 9.2% quarter-on-quarter in the first quarter.”
Current account deficit narrowed significantly to lowest since Q2 2011 in Q2 – EY ITEM Club comments
- The current account deficit narrowed significantly to just £2.8 billion (0.6% of GDP) in Q2 from £20.8 billion (3.7% of GDP) in Q1. This was primarily due to an unusual, marked surplus on the trade balance. This reflected UK imports of goods and services falling 23.1% quarter-on-quarter amid weaker domestic demand while exports fell a substantial, but lesser, 12.8% quarter-on-quarter
- While it is likely to widen again, with UK domestic demand well off its Q2 lows, a narrowing in the current account deficit is a particularly welcome development for the UK
- The current account deficit has been seen as a potential source of vulnerability for the UK economy – particularly if there is were to be a loss of investor confidence in the UK for any reason. The elevated deficit led former Bank of England Governor Mark Carney to comment that “relying on the kindness of strangers is not optimal” amid global economic uncertainty
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“In welcome news, the current account deficit narrowed significantly in the second quarter to be at its lowest level since the second quarter of 2011. It reached just £2.8 billion (0.6% of GDP) in April-June after widening to £20.8 billion (3.7% of GDP) in the first quarter from £13.3 billion (2.4% of GDP) in the fourth quarter of 2019. It had been as high as £36.1 billion (6.6% of GDP) in the first quarter of 2019.
“The current account narrowing was driven by the trade balance achieving a substantial surplus (£16.6 billion), up from £493 million in the first quarter. Imports of goods and services fell 23.1% quarter-on-quarter in the second quarter as they were limited by a decline in UK domestic demand. Meanwhile, exports declined by a lesser 12.8% quarter-on-quarter amid weakened global economic activity and trade.
“Another positive development saw the shortfall on the primary income account narrow to £10.5 billion in the second quarter of 2020 from £14.9 billion in the first quarter. This was primarily because of a larger fall in payments to foreign investors on their UK investments than the fall in UK earnings on foreign investments and was mostly because of losses incurred through foreign direct investment (FDI).
“The narrowing in the current account deficit in the second quarter is a very welcome development for the UK, although the EY ITEM Club’s suspicion is that it will widen again with domestic demand well off its second quarter lows.
“The current account deficit has long been considered a potential source of vulnerability for the UK economy – particularly if there were to be any major loss of investor confidence in the UK for any reason. The elevated deficit led former Bank of England Governor Mark Carney to comment that “relying on the kindness of strangers is not optimal” amid global economic uncertainty.”