By Jeph Ajobaju, Chief Copy Editor
Buffeted by Brexit uncertainty and by coronavirus, the United Kingdom economy shrank 9.9 per cent in 2020, the largest Gross Domestic Product (GDP) dip in three centuries.
Covid-19 pandemic effectively wiped out all growth in the UK over the last seven years, returning the economy close to the size it was in 2013.
The 9.9 per cent slump was less severe than expected but still surpassed the 9.7 per cent collapse experienced during the Great Depression in 1921, making it the worst annual drop since 1709, according to a Bank of England database.
That was when Europe’s harshest winter in 500 years caused widespread death and destruction, per CNN.
“This time it’s a pandemic to blame whereas back then, it was a Great Frost, which saw ice in the North Sea, and the War of Spanish Succession … which was doing the damage,” wrote Societe Generale strategist Kit Juckes in a research note.
There were some signs of improvement in the final months of 2020, with GDP estimated to have increased by 1 per cent in the fourth quarter (Q4 2020), following record growth in the third, according to the Office for National Statistics.
But there were big swings in output between October and December, largely tracking the level of restrictions imposed to contain the coronavirus.
Outlook for Q1 2021
CNN recalls that the UK suffered one of the worst recessions among major economies last year. Germany, for example, held up better in the pandemic than it did during the global financial crisis.
Provisional estimates suggest Europe’s biggest economy contracted by 5 per cent last year. EU (European Union) GDP, meanwhile, is expected to have shrunk 6.4 per cent, according to Eurostat.
The United States fared even better by comparison, with GDP decreasing by 3.5 per cent from the prior year.
“Today’s figures show that the economy has experienced a serious shock as a result of the pandemic, which has been felt by countries around the world,” UK finance minister Rishi Sunak said in a statement.
“While there are some positive signs of the economy’s resilience over the winter, we know that the current lockdown continues to have a significant impact on many people and businesses.”
The new national lockdown in the UK, imposed on January 5, is expected to hit the economy hard in Q1 2021, reversing the return to growth in Q4 2020.
“It seems that a double dip [recession] was merely delayed rather than avoided outright,” Sam Miley, an economist at the London-based Centre for Economics and Business Research said in a note.
Disruption to EU-UK trade following the end of the Brexit transition period on December 31 is also weighing on activity.
British exporters have struggled to get their products into Europe due to border delays and glitches in new customs systems. Companies selling fresh produce, such as live shellfish and meat, have in some cases had to discard their products as a result.
Even once the dust settles, new trading arrangements are expected to add additional costs to UK companies, which rely on Europe for a large portion of their imports and exports.
Effects of pandemic on personal finance
The pandemic has left more than a quarter of British adults financially vulnerable, with too much debt or not enough savings to cope with a “negative life event” such as redundancy, loss of working hours, or ill health, according to a survey published by the Financial Conduct Authority (FCA).
The survey also found that nearly 40 per cent of British adults suffered financially as a consequence of the pandemic, with younger workers, Black people and the self-employed among the hardest hit.
But half of adults in the FCA survey said the pandemic had not disturbed their finances, while some 15 per cent of adults were financially better off.
That could lay the foundation for a savings-led boost to demand, according to Bank of England chief economist Andy Haldane, who pointed to high savings rates among UK households in an opinion piece published in The Daily Mail on February 12.
“The rapid rollout of the vaccination programme across the UK means a decisive corner has been turned in the battle against Covid,” he said.
“A decisive corner is about to be turned for the economy too, with enormous amounts of pent-up financial energy waiting to be released, like a coiled spring,” he added.
Hope of avoiding double-dip recession
The contraction in 2020 “was more than twice as much as the previous largest annual fall on record”, the Office for National Statistics (ONS) said.
However, the BBC adds, the economy looks set to avoid a double-dip recession after growth picked up at the end of the year.
In December, the economy grew by 1.2 per cent, after shrinking by 2.3 per cent in November, as some restrictions eased.
Hospitality, car sales and hairdressers recovered some lost ground, the ONS said.
The growth meant that in the October-to-December quarter the economy expanded by 1 per cent. As a result, the UK is expected to avoid what could have been its first double-dip recession since the 1970s.
A double-dip is when the economy briefly recovers from recession, only to quickly sink back. A recession is generally defined as two consecutive quarters where the economy contracts.
ONS deputy national statistician Jonathan Athow said: “An increase in Covid-19 testing and tracing also boosted output. The economy continued to grow in the fourth quarter as a whole, despite the additional [lockdown] restrictions in November.”
According to the BBC, GDP was first measured in the aftermath of the Second World War, and the measure has never previously dropped by more than 4.1 per cent in a year.
However, the Bank of England models GDP going back centuries, and the 2020 contraction could be the worse since 1709.
Suren Thiru, the head of economics at the British Chambers of Commerce, said: “Despite avoiding a double-dip recession, with output still well below pre-pandemic levels amid confirmation that 2020 was a historically bleak year for the UK economy, there is little to cheer in the latest data.”
All four economic sectors tracked by the ONS saw a drop in output, with the highest fall coming in the construction sector, which contracted by 12.5 per cent.
“Today’s figures show that last year our economy experienced a significant shock, and also some signs of resilience over winter”, Sunak told the BBC.
“You know what’s clear is right now, many families and businesses are experiencing hardship. That’s why we’ve put in place a comprehensive plan for jobs to support people through this crisis, and we will set out the next stage of our economic response at our Budget in early March.”
But shadow chancellor Anneliese Dodds insisted that “these figures confirm that not only has the UK had the worst death toll in Europe, we’re experiencing the worst economic crisis of any major economy.
“Businesses can’t wait any longer. The chancellor needs to come forward now with a plan to secure the economy in the months ahead, with support going hand-in-hand with health restrictions.”
However, Sunak countered that international economic comparisons were not necessarily a useful yardstick.
“We calculate GDP in a different way to pretty much everybody else. And if you either correct for that difference or look at it in a way that’s more comfortable with nominal GDP, what you find, as the Bank of England and the ONS have pointed out, is that our performance is very much in line and comparable to other countries.”
Economists said that with Covid-19 restrictions expected to remain until early spring, the hit to the economy will continue over the next few months.
“We anticipate a sharp decline in activity during the first quarter of the year,” said Kemar Whyte, senior economist at the National Institute of Economic and Social Research.
“Nevertheless, growth will pick up from the second quarter onwards as restrictions ease on the back of a successful vaccination programme.”
Scale of the hit
As expected the economy stabilised in the last quarter of 2020, the BBC explained, but said the latest set of statistics confirm the scale of the hit over the whole of last year.
A technical return to recession has been avoided, with the economy returning to growth at the end of last year.
But the economy is certainly falling again so far in the first three months of 2021, due to the tough national lockdowns, as well as some impact from increased trade barriers with the EU.
Sunak and the Bank of England will be paying much more attention to what is going on right now. The renewed lockdown has hit growth considerably again, but not as hard as last April.
Businesses and households remain in holding pattern ready to unleash pent up growth when the economy is reopened.
While the vaccine will eventually unlock that growth, the precise timing is still uncertain, and the government remains under pressure to maintain significant sums in economic support.
Coiled spring
Last year’s contraction is steeper than almost any other big economy, although Spain suffered an 11 per cent decline.
Britain has reported Europe’s highest death toll from coronavirus and is among the world’s highest in terms of deaths per head of population.
Much of the damage to the UK economy is attributed by economists to a high dependence on the service sector, which suffered particularly badly during the year because of lockdown.
However, Britain has vaccinated many more people than other European countries so far, raising the prospect of a bounce-back for its economy later this year.
That potential fast rebound prompted the Bank of England’s chief economist to describe the economy as like a “coiled spring” ready to release large amounts of “pent-up financial energy”.
Andy Haldane said that consumer confidence would surge back thanks to the vaccine programme, with the economy firing “on all cylinders” by spring.
“There are reasons for cautious optimism, because the vaccine roll-out is going really well,” Sunak told the BBC.
“The prime minister will set out a roadmap for exiting restrictions in the next few weeks and months. It will be the week of February 22nd, and it’s related that we base our roadmap on the best possible evidence of data.”
