The real “news” in today’s official GDP data is not that UK economy shrank for a second successive quarter in the three months to June, thus meeting the usual definition of a “recession”. That was a racing certainty anyway, given the collapse in economic activity in April and the limited recovery in the monthly data for May, which had already been reported.
Given these numbers, it was also no surprise that the UK is likely to have recorded the biggest quarterly decline in GDP of any major economy (but I’ll come back to the significance of this later).
Indeed, as well as being “old” news, this is not necessarily even “bad” news. The slump was the result of the government’s decision to shut down large parts of the economy and to discourage many people from doing what they would normally be doing in order to save lives. It certainly seems odd for people who have been calling for even tighter restrictions to express dismay at the impact on GDP. Frankly, this is what they wanted.
The real news today – the piece of the jigsaw that was still missing – was the monthly data for June itself. These confirmed that the recovery that began in May accelerated in June, with GDP rising by 8.7% in the final month of the quarter.
It is also worth noting the small upward revisions to GDP growth in April and May (every little helps…). April’s fall was revised to a decline of 20.0%, up from the previous -20.3%, while May’s rise was nudged up to 2.4% month on month (from +1.8%). Taking these revisions into account, GDP is now up more than 11% from its April trough. Even the 20.4% fall in the second quarter as a whole was not quite as bad as some feared.
Of course, there is still plenty for the pessimists to pick on. For a start, GDP is still more than 17% below its level in January, before the pandemic struck. But these particular data only take us to the end of June, when the recovery was going through its earliest stages. The latest business surveys and other timelier indicators suggest that the economy has continued to pick up since then.
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Others have focused on the likelihood that the UK will be at the bottom of the league for growth in the second quarter. In part, this is because a relatively large share of the UK economy is made up of consumer spending and services that are more likely to be constrained by social distancing. (This was a point underlined by the OECD in its June Economic Outlook.)
However, the UK’s relatively poor showing in the second quarter is mainly because other countries began their official lockdowns earlier, and so took a bigger hit to growth in the first quarter instead. If you combine the data for these two quarters, the fall in UK GDP was much closer to that experienced by France or Italy, and actually slightly smaller than that of Spain.
Admittedly, that’s not much to cheer. But the flipside is that the UK should leap towards the top of the table in the third quarter and beyond, assuming that the restrictions continue to be lifted and consumers and businesses continue to regain the confidence to spend. Hopefully, the next major milestone will be the return of children to schools in England in September which will help establish a greater sense of normality.
Inevitably, there are risks. It may be right to be worried about a fresh wave of redundancies in the autumn as the government’s Job Retention Scheme is wound down. But most people have already returned from furlough and our relatively flexible economy is good at creating new jobs to replace any that are lost – provided markets are allowed to work properly.
The additional employment measures announced by the Chancellor, Rishi Sunak, in his ‘Summer Economic Update’ should also be helpful, especially for the low-paid workers and younger people whose jobs are among those most at risk.
The other big unknown is the threat of a devastating second wave of coronavirus itself. But it should be possible to deal with any local outbreaks with local restrictions, rather than another nationwide lockdown.
In summary, April was dreadful, but the real message from today’s GDP data is that the economy is already rebounding. The recovery should therefore still look as much like a “V” as the gradual lifting of the emergency measures allows, despite the prospect of a painful bump in unemployment in the meantime.
The author is an independent economist who has worked for HM Treasury, HSBC, Standard Chartered Bank and Capital Economics. @JulianHJessop