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The cost of the recession will be £9,000 for each family in Britain.

  • Monday, May 18, 2020

Bank of EnglandThe Office of National Statistics (ONS) published the UK GDP growth figures for the first three months of the year. Unsurprisingly the economy contracted by -2% driven down by a record fall of in activity in late March when the lockdown started. The figures were less negative than consensus estimates, though it does represent the largest fall in GDP since the fourth quarter of 2009 and the Global Financial Crisis. When compared to the corresponding figures from the USA -4.8%, eurozone -3.8% and specifically France -5.8% and Italy -4.7% these are relatively good.

Looking ahead, we expect to see a double-digit decline in GDP for the second quarter, given the economy was in lockdown for all of April, and has only just started to re-open in the middle of May.

Consumer spending fell by 30% while spending on travel and hospitality as well as High Street retail sales fell by 80%. The Office of Budget Responsibility (OBR) estimated that the construction industry output declined by 70% and manufacturing output fell by 55%. However, the food and drink sector maintained its production levels.

These figures come after the Bank of England (BoE) warned that the UK would face the sharpest recession on record. The BoE is forecasting a fall of -14% in 2020 but that this decline will be short and sharp as renewed economic activity will result is a predicted 15% recovery in 2021. The BoE expect the decline to be less prolonged than that of the Global Financial Crisis, which took 5 years to fully recover from. The BoE expects the economy to rebound within 2 years this time. This prediction has however been called ‘optimistic’ by some investment managers. The economic pull back will be aided by the extensive and extended furloughing scheme which will allow workers to return to the economy swiftly.

The BoE expects unemployment to rise to over 9% this year up from the recent low rate of 4%. Inflation is expected to fall to zero by Q1 2021, partly helped by falling petrol and energy costs. Inflation is expected to stay very low for at least 2 years.

If the rate of infections and fatalities continues to fall, additional services should resume from June, paving the way for a wider re-opening of restaurants, bars etc. in July. However, this should be seen as a best possible case scenario as the risk of delays or even a second wave of infections pose a significant risk to the outlook.

The Resolution Foundation has calculated that the cost of the recession for each family in Britain will be £9,000.

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Chris Davies

Chris Davies

Chartered Financial Adviser

Chris is a Chartered Independent Financial Adviser and leads the investment team.

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