UK economy shrinks by 2% in first quarter

Despite intervention from governments and central banks, this is the biggest drop in a single quarter since the financial crisis

Article updated: 13 May 2020 10:00am Author: Helal Miah

  • While better than feared, figures don’t tell the real story since the lockdown began
  • Worst affected sectors include ‘Other Services’ e.g. hairdressers, while professional services fared better
  • Latest forecasts show even greater impact in Q2, with estimates ranging between 20 – 30%

The economy during the first quarter shrank by 2%, the most in a single quarter since the financial crisis. However, while it was a little better than feared, it doesn’t tell the real story since the UK lockdown began in mid-March. Equally, the monthly figure for March doesn’t tell the whole story, but the economy falling by 5.8% is somewhat closer to reality. We also had industrial and manufacturing production for March falling by 4.2% and 4.6% respectively, which again does not truly reflect the economic damage.

The GDP breakdown did show the sectors worst affected include those such as Other Services, which includes hairdressers, while professional services were less impacted as these businesses could switch to staff working from home. We’ll see the full extent of the damage to the economy for Q2 with estimates at anything in between 20-30% according to economists.

For investors I feel today’s numbers aren’t helpful to ascertain as to which direction the markets head from here. We’ve had the bounce in the stock market from March’s lows but 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. While earnings are being revised lower, the “p” part of the equation will need to go lower too.


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Helal Miah portrait photo
Helal Miah

Investment Research Analyst

After graduating with an economics degree from University College London, Helal started his career within private banking at Smith & Williamson Investment Management and later held analyst and fund manager roles with the Industrial Bank of Japan, Schroders and Mitsubishi Corporation. He is a chartered fellow of the Chartered Institute for Securities & Investment. 

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