Britain discovered on Wednesday that its economy was suffering a recession deeper than any other reported by a European or North American country during the coronavirus pandemic.
The reasons for the sharp decline in the second quarter include an economy that demands heavier than most on consumer spending and a longer national closure than its neighbors.
Yet the cost of the pandemic still set a grim record. Last month, the government reported that Britain had the highest rate of excessive deaths in Europe.
“A few months ago I said that hard times are coming and today’s figures show that hard times are here,” Rishi Sunak, Britain’s chief executive, said on Wednesday.
Economic output fell by 20.4 percent from April to June, compared to the previous quarter, official preliminary statistics showed on Wednesday. It is the worst recession since the government began to hold in 1955 and takes the British economy back to the size it was in 2003. The fall in gross domestic product was twice as large as in the United States and Germany.
The government’s relatively slow response to the pandemic in March largely explains the fate of Britain. The closure of schools and businesses began weeks later in Britain than in some neighboring European countries. In those crucial days, the coronavirus was able to spread further and the problem was exacerbated by failures in contact tracking, testing and the protection of nursing homes.
This led to a longer period under a violent lockdown, which began in early March and only began to be lifted in mid-June. Compared to the United States, which instituted state-by-state closures of varying lengths and difficulty, the closure of Britain also affected a larger portion of the population for an extended period of time.
The longer lockdown was “at the root of the economy’s underperformance,” wrote Samuel Tombs, an economist at Pantheon Macroeconomics, in a research note.
An Oxford University index on the severity of government responses, including school closures and jobs and travel commitments, showed that Britain’s lockdown was more severe in the second quarter than in Italy, Germany, Spain and the United States. .
Britain was also more vulnerable to the economic impact of social distance measures because of its large service sector. In the second quarter, spending on accommodation and food services – a category that includes hotels and restaurants – fell by 87 percent.
Mr Tombs said one reason Britain was suffering more economically than its peers was that it was so heavily dependent on consumer spending, hampered by the lockdown. Also, he noted, there are many working parents in their workforce, many of whom had to stop working to care for their children while schools and other care options were closed.
These are “structural disadvantages” that are likely to mean that Britain’s recovery will lag behind others for the rest of the year, he said.
A one-month breakdown showed that the UK economy continued to pick up in June, climbing 8.7 per cent from May when construction activity returned and consumer spending returned. However, the Bank of England said last week that it did not expect the recovery to be complete by the end of 2021.
Unlike Germany, for example, where the economy is more dependent on manufacturing, Britain’s recovery will require consumers to feel confident enough to venture out and spend, and for companies to invest. That can only be determined by how effective the government is at keeping the virus at bay until there is vaccine.
Mr. Sunak said the government’s response to the pandemic had shifted from broad nationwide lockdowns to the use of traces and tests to intervene more quickly at local levels. Already parts of the north of England are under new restrictions.
To keep the recovery from stagnation, the government is encouraging people to be able to return to work in offices and is planning to reopen schools next month. To secure jobs for the next generation of workers, the Treasury introduced a program to pay the salaries of some young people for six months and promote student programs. It also spent more than £ 53 million ($ 69 million) last week as part of a monthly incentive plan that pays for meal discounts at restaurants and pubs on Mondays, Tuesdays and Wednesdays.
But the effects of these measures could be short-lived if there is a wave of layoffs in the fall. Analysts are worried about what will happen if the government’s furlough program, which ends a substantial share of the wages of as many as 9.6 million workers, a third of Britain’s workforce, in October.
A recent survey found that one-third of companies plan to cut jobs by the end of September. Even with the furlough program, the UK job market recorded its biggest drop in employment since 2009 in the second quarter.
“The challenge for the UK economy is that the government hopes that by the end of October, the economy is ready to absorb back all the jobs held over the summer, which depend on the path of the virus, “said Hugh Gimber, a strategist at JP Morgan Asset Management.” We have doubts that the UK economy will be ready. “
The risk is that the furlough program has only slowed an increase in unemployment, rather than preventing it.
Britain could still shake its label “worst in Europe” for recovery. Although cases of coronavirus have increased in recent days, the spikes are smaller than those recorded in Spain, France and Germany.
“This can shift very quickly,” Mr Gimber said. “The winners of one week can be the next losers. The ability to truly maintain control over the virus may disappear altogether. ”
