The latest data on UK GDP was awful, but that was not surprising. Perhaps of more significant concern is that the UK economy saw the biggest contraction of all the advanced economies for which we have data.
Why are the UK’s GDP figures so bad?
Spain ran the UK close and by some measures did worse. The US is in deep crisis too, although it will be a while before we can make a straight comparison. But what we can say is that if we compare GDP in the second quarter of this year, with the quarter before, the UK contracted 20.4%. Spain was down 18.5%. Other economies for which we have data include France, (-13.8%), Germany (-10.1%), and Italy (contracted 12.4%.)The Eurozone contracted 12.1%, the EU by 11.9%.
The US saw an annualised contraction of 32.9%, but then that is annualised, which is quite different from quarter on quarter.
So why is the UK so bad?
Looking at one quarter in isolation can be misleading. Lockdown was imposed later in the UK (March 23rd) than across most of the EU. Indeed, the UK saw a much milder, 1.7% contraction in Q1.
So how did the EU do in the previous quarter?
If we look at Q1, we find this difference in lockdown timing goes a long way towards explaining the UK’s poor performance in Q2 but does not fully explain it.
Germany contracted 2% in Q1, Spain by 5%. France was down by 5.9%. The EU lost 3.2%, the euro area 3.6%.
Look at the annual rate
Maybe, then it would be more helpful to look at the annual rate of contraction. If we do this, we find that the UK is no longer bottom. It’s second from the bottom.
|Where||Contraction in Q2 2020 versus Q2 2019|
Or we can look at the sectors that performed especially severely in the UK.
Accommodation and food contracted by a staggering 86.4% in April. Both construction and arts and entertainment contracted by over 40%. Other sectors to see a significant contraction include wholesale, retail and motor repairs, education, manufacturing and storage.
Some sectors are already seeing a sharp recovery. Accommodation and food expanded by 68.2% in June. Wholesale, retail and motor repairs grew by 27%, construction by 23.5% and arts and entertainment by 26.7%.
Overall, the UK economy expanded by 8.7% in June.
Vs and Ws
So far, we see something that looks like a three quarter formed V contraction and recovery. The economy contracted enormously, is recovering, but so far, it is less than halfway up the rising part of the V.
Will the recovery continue?
Whether the recovery continues, depends on what happens next with Covid. I am genuinely quite scared about Covid returning in the winter. I have a nasty feeling the second wave will claim a lot more lives.
But the longer-term trend will be recovery, that is down to the sheer mathematics that economies can’t contract forever — if they did, that would be Armageddon.
But the labour market will take a severe hit. Many furloughed workers will be laid-off. As a result, demand will crash. No matter how much the government stimulates the economy, recovery won’t be instantaneous. The forces that push the economy up or down move slowly.
I think there is a chance that post-Covid, the global economy will be stronger — supported by creative destruction and an acceleration towards digital technologies. The risk to this lies with the possibility of a continued reversal in globalisation.
I worry about the UK, though.
I am not sure how much of a role Brexit played in the UK’s weak performance relative to the rest of the EU.
But I think that in the troubled post-Covid era, Brexit will make things just that little bit harder for Britain.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees