April has seen the worst ever recorded fall in GDP for the UK, in painful evidence of the economic damage being done to the country by the outbreak of Covid-19.
Last week's Office for National Statistics (ONS) figures, showed the nation's Gross Domestic Product (GDP) shrank by a massive 20.4% in April. As the first full month of lockdown, the figures also give a worrying hint at what could be expected for Q2 as a whole.
The fall of 20.4% is far worse than even during the 2008 financial crisis and subsequent recession, when GDP fell by just 6.9%.
The GDP growth figures came as little surprise to Bank of England governor Andrew Bailey however. "Obviously it's a dramatic and big number, but actually it's not a surprising number," he said. The governor went on to say the Bank was "ready to take action", to support the UK economy through the crisis.
ONS Chart showing UK GDP growth rate up to Q1 2020.
Unlike the UK, which releases monthly GDP figures, many nations issue only quarterly figures. In comparison, in the first 3 months of 2020, Japan's GDP fell by 3.4%, Germany by 2.2% and France by 5.8% though these figures may not have been revised to account for the final weeks of March as the ONS has done in the chart above.
Few countries have avoided the impact of the pandemic however; many have experienced economic damage, either through strict lockdowns – which have kept infection rates down – but at the cost of severe restrictions, or with laxer restrictions which have now resulted in more serious outbreaks.
The drop in economic output has unfortunately also been mirrored somewhat in unemployment. The lockdowns in April and May saw the number of British workers in employment fall by more than 600,000. Of those that are still in work, more than a quarter – 9.1 million – are now on the government's furlough scheme. In addition, 2.6 million self-employed have also claimed for support grants.
According to further ONS figures the number of job vacancies was also down by 342,000 to 476,000 in this period of time. Many analysts also warn that unemployment numbers are being kept down only thanks to the furlough scheme, and when it ends (currently expected to be October) that many more people will be let go as businesses attempt to cut costs. This is in addition to the already thousands of jobs being cut by businesses worldwide.
The government claims to be doing all it can to help the UK's struggling workforce. The cost of its furlough scheme has risen to £20.8 billion. Larger firms have already received £10.11 billion in loans from the government.
As part of Andrew Bailey's 'ready to take action’ policy, the Bank of England will support this government spending. The Bank is therefore widely expected to make an extra £100 billion of bond purchases, which would follow on from £200 billion already bought since March, in a spending spree that is being replicated by central banks of many countries.
Government debt is rapidly growing, and at some point, it must start to claw back revenue. For the UK, first blood may come from pensions. Amongst his many other options, Chancellor Rishi Sunak is likely to end or amend the triple-lock protection on state pensions, thereby breaking one of the government's earlier election pledges.
The scheme was introduced in 2010 by the then coalition government. It guaranteed the state pension to rise each year by 2.5 per cent and match the highest of price inflation or average earnings growth.
With economic activity frozen, the UK economy has also experienced its lowest inflation rate since June 2016. ONS figures show consumer price inflation this month fell to 0.5% from last month's 0.8%. Extremely low fuel prices, resulting from the plummeting crude oil price, are the major contributor to these figures.
It is widely anticipated that inflation will remain low for the next few months. A major fear however is that, fuelled by huge government spending, as the UK comes out of lockdown and ends social distancing, inflation could rise out of control and even reach levels of hyperinflation. The contrary fear is that continued Covid-19 cases, huge unemployment, a resulting lack of public spending, and falling economic activity could lead to an even worse deflationary scenario.
April’s GDP slump represents just the first month of Q2, and the first full month of lockdown, so May and June’s figures – expected to also be negative – will officially place the UK economy at the start of what is expected to be the worst recession in modern history. Many investors have already turned to gold to protect their wealth in the past few months, but with quantitative easing and inflation on the horizon many more will be seeking safe havens as well.