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The British Economy Shrank by 2% in the First Quarter of 2020

As analysts continue to study the effect of the lockdown on the global economy, it has been revealed that the UK suffered a 2% contraction in the first quarter of this year. In terms of the recovery, it is now believed that it may take a different form from what was originally predicted.

The Full Details

The Office for National Statistics (ONS) released figures showing that the country’s GDP dropped by 5.8% in March. This came after January and February showed a rolling three-month growth rate of 0%.

The fall for the month of March was the biggest ever recorded, while the quarterly contraction was the largest since the final quarter of 2008. In the month of March, the British economy fell by as much as it dropped in the 18 months following the start of the last financial crisis in 2008.

Among the sectors most affected are accommodation and the food services industry. The relatively few sectors that grew during the quarter included companies that make pharmaceuticals and cleaning products, as well as IT support.

Services, manufacturing and construction all suffered "widespread" declines. One of the worst affected areas has been services. This sector, which covers hotel, travel agents and retail firms, had a record drop of 1.9%.

The nation’s household spending dropped by its fastest rate in over a decade, as many businesses closed. However, increased spending on food, TVs and alcohol helped to soften the decline.

Other countries that entered lockdown earlier suffered bigger drops in their GDP in the first quarter. For example, Spain fell by 5.2% and China by 9.8%. In many parts of the world, commercial debt recovery is one of the processes being used to help ailing firms.

What Has the Reaction Been Like?

The ONS pointed out that these numbers signal “the first direct impacts of the coronavirus (COVID-19) on the economy”. In fact, they show that the economy was falling heavily within just a couple of weeks of the lockdown beginning.

It is widely expected that April’s figures will be far worse, and that the damage will continue into May at least.

A degree of surprise was shown by some commentators, who had expected these numbers to be even worse. An estimate of a 2.6% drop in the first quarter had been made by several economists before these numbers were revealed.

The Chancellor, Rishi Sunak, pointed out that the impact of just a few days at the end of the quarter caused this fall in the GDP. He said that the country is probably in the midst of a "significant recession".

Meanwhile, the Office for Budget Responsibility has confirmed that the measures taken by the government to protect the UK economy will end up costing £123 billion in total. Cash borrowing for 2020 will be impacted by over £103 billion due to the likes of the furlough scheme.

As thoughts turn to the economic recovery that is expected to take place, it is now believed that this could be ‘W’ shaped rather than ‘V’ shaped, as originally expected. This would mean that an additional downturn will be seen before the final period of recovery.