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UK economy enters ‘technical recession’

ToM13.08

The UK, duly criticised of being complacent and too slow to act during the early stages of the COVID-19 outbreak, is now paying a heavy price. Apart from the consequent impact on the economy, leading to a 20.4 per cent slump in the second quarter, outstripping the US economic downturn and pushing it into its first recession since 2009, the country also has Europe’s highest death toll from the pandemic.

Albeit efforts to try to mitigate the ensuing health and economic impact, mainly a result of the government’s failure to prevent the virus from spreading, the most recent economic data show that the efforts made may have been futile.

Following a 2.2 per cent decline in the first quarter of 2020, preliminary estimates showed that the UK’s Gross Domestic Product (GDP) – the total monetary value of all finished goods and services produced and sold within a country’s borders in a specific period, shrank by 20.4 per cent in the second quarter of 2020, edging higher than an anticipated 20.5 per cent, with widespread contractions across all sectors. Notably, private consumption, down by 23.1 per cent, accounted for more than 70 per cent of the decline in GDP. Also, notable falls in both government consumption (-14 per cent) and gross fixed capital formation (-25.5 per cent) led to the decline. Meanwhile, net external demand contributed positively as imports fell more than exports.

An economic recovery from the depths of the employed lockdown measures, to reduce contagion and which ultimately led to a deterioration in economic growth, gained momentum in June, with output bouncing back by 8.7 per cent month-on-month. Despite being broadly in-line with the Bank of England’s latest estimates, the bounce brought about by the easing in lockdown restrictions and thus resumption of business came slightly better and faster than initially anticipated.

Portraying the above quarterly slowdown, construction and industrial production suffered record declines, particularly in the sectors exposed mainly to government restrictions.

Year-on-year, following an upwardly revised 40 per cent slump in May, construction output in the UK declined by 24.8 per cent in June, the figure being higher than an expected 29.5 per cent plunge. In June, while adhering to social distancing measures, the return of several contractors to their place of work led to the improved numbers. As conferred, in comparison to the previous quarter, construction output declined by a record of 35 per cent. Meanwhile, on a monthly basis, construction output recorded a substantial 23.5 per cent increase, higher than the previous monthly growth of 7.6 per cent.

Similarly, on both a yearly and quarterly basis, industrial production in the UK registered a 12.5 and 18 per cent drop respectively. Month-on-month, industrial production beat economist expectations to record a 9.3 per cent gain – the highest increase in industrial production since March 1972, following an upwardly revised 6.2 per cent increase in May. Albeit the latter growth, as things stand, industrial production remains 11.6 per cent below February figures, portraying pre-coronavirus levels.

With regards to the labour market, UK’s unemployment rate in the second quarter stood still at 3.9 per cent, unchanged from the previous three month period and below economist expectations of 4.2 per cent, as many gave up looking for work and were thus not considered to be unemployed. With government support expected to be withdrawn later on in October, fears of a substantial increase in unemployment loom large.

As hopes of a swift V-shaped recovery have now sunk, we recommend caution when threading into the UK financial markets. Albeit the recent month-on-month improvements, should the spread of COVID-19 pandemic persist, possibly leading to the so-called ‘second wave’ and re-introduction of lockdown measures, thus impeding business continuity, we may indeed witness further deterioration in economic data.

Disclaimer: This article was issued by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. For more information, visit, https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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