Coronavirus: What is a recession and what will the likely economic impact be?

ONS says economy contracted by record 20.4 per cent in second quarter 

Peter Stubley,Rory Sullivan
Wednesday 12 August 2020 11:06
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Chancellor confirms 'hard times are here' as UK plunges into economic recession

Official figures released on Wednesday show that the UK economy has suffered a record contraction and has officially entered into recession, confirming experts’ predictions about the scale of the economic damage caused during the pandemic.

The Office for National Statistics (ONS) announced the UK economy’s fell by a staggering 20.4 per cent between April and June.

This follows a 2.2 per cent quarter-on-quarter slump in the first three months of the year, towards the end of which the UK went into lockdown.

Britain’s recession is much greater than that of comparable economies in Europe such as Germany and France.

When did the recession start?

It has long been known that the UK was struggling economically and was in the grips of a significant recession, with a dramatic rise in unemployment claims and in business closures seen since the introduction of lockdown on 23 March.

However, it is only with the release of the ONS’ official economic figures for April to June on Wednesday that the UK officially fell into recession, as the technical, commonly-accepted definition of a recession is a contraction in gross domestic product (GDP) for two or more consecutive quarters.

In other words, we are now in a recession because the total amount of goods and services produced by the UK has fallen for a total period of six months.

Some experts, including Samuel Tombs at Pantheon Macroeconomics, have blamed the government’s slow response to the virus as the reason for the UK’s record contraction.

“The long duration of the lockdown in the second quarter, due to the government’s slow response to Covid-19 in March, followed by its failure to prevent the virus from spreading from hospitals, was at the root of the economy’s under-performance in the second quarter,” Mr Tombs said.

How bad will the recession be?

Earlier this year, the Treasury’s official forecaster, the Office for Budget Responsibility (OBR), predicted that UK GDP could fall by a staggering 35 per cent in the second quarter of 2020.

Although the slump in the second quarter was not as disastrous as the OBR’s worst-case scenario, the real figures highlight the scale of the problem Britain faces, with unemployment expected to rise sharply before the end of the year.

Chancellor Rishi Sunak said on Wednesday: ”I’ve said before that hard times were ahead, and today’s figures confirm that hard times are here. Hundreds of thousands of people have already lost their jobs, and sadly in the coming months many more will.”

Some forecasts think that the number of unemployment people will rise to above the 3 million mark – a level not seen since the 1980s – and many of them are urging the government to extend its furlough scheme beyond October.

Frances O’Grady, general secretary at the umbrella Trades Union Congress, said: ”The best way to get our economy back on its feet is to keep people in work.”

Aside from the pandemic, another problem for the economy is the uncertainty over the UK’s future post-Brexit trading relationship with the European Union and countries outside the bloc.

Alpesh Paleja, lead economist at the Confederation of British Industry, said: ”The dual threats of a second wave (of contagions) and slow progress over Brexit negotiations are also particularly concerning, underlining the need for maximum agility from government on both these issues, allowing a greater focus on the economy’s long-term future.”

When will the UK economy recover?

It is unclear how long it will take for the UK’s GDP to reach its pre-virus level.

Any recovery depends on the persistence of Covid-19 and the possibility of a “second wave” of infection.

After lockdown was eased in June, the British economy grew by a monthly 8.7 per cent.

“The economy began to bounce back in June with shops reopening, factories beginning to ramp up production and house-building continuing to recover,” said statistician Jonathan Athow.

The British government hopes that the reopening of pubs and restaurants, which happened in July, will enable the economy to start bouncing back.

However, it looks like there will be a “long road” to recovery.

Melissa Davies, chief economist at Redburn, said: “There is a long road ahead for the UK economy to claw back its pandemic losses, all the while facing deflationary headwinds from large amounts of spare capacity and job losses.

“As the furlough scheme rolls off, more stimulus will be needed to support household incomes, not least if infection numbers rise in the autumn.”

Additional reporting from agencies

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