UK plunges into worst recession as GDP shrinks by a fifth

The UK economy shrank by a fifth in the second quarter of 2020 as the country sank into the deepest recession on record because of the Covid-19 crisis.

Gross domestic product dropped 20.4% in the three months to the end of June from the previous quarter, the Office for National Statistics said. The record drop, broadly in line with expectations, was caused by the near shutdown of the economy from late March as the government sought to stem the spread of Covid-19.

The pandemic has hit the Britain's economy harder than other developed countries. The decline in UK output in 2020 is double that of the US and only slightly better than Spain in Europe. The governor of the Bank of England has said this is partly because the UK has a bigger services sector that relies on human interaction.

The second-quarter plunge followed a 2.2% contraction in the first three months of 2020 which covered the early stages of the virus's spread in the UK and the start of the economic shutdown. That puts the economy into a technical recession defined by two quarters of shrinkage though the second-quarter drop alone is the biggest recorded.

Figures for June showed GDP increased 8.7% as shops, factories and construction sites started to reopen but the economy is still 17.2% smaller than before the virus hit the UK, the ONS said.

“The recession brought on by the coronavirus pandemic has led to the biggest fall in quarterly GDP on record," ONS statistician Jonathan Athow said. "GDP in June still remains a sixth below its level in February, before the virus struck."

Economists fear further bad economic news even after the lockdown ended reopened as the government withdraws its support for jobs and businesses. UK employment fell at its fastest pace in more than a decade in the second quarter not including millions of workers on the government's furlough scheme, which is due to end in October.

Tej Parikh, chief economist at the Institute of Directors, said: “These dire figures highlight the painful reality households and businesses across the country are facing. The battle now is to prevent longer-term scarring from this plunge in economic activity."

He called on Chancellor Rishi Sunak to cut employment costs immediately by reducing employers' national insurance contributions and to examine restructuring options for business loans and grants for small businesses.

Sunak said: “Today’s figures confirm that hard times are here. Hundreds of thousands of people have already lost their jobs, and sadly in the coming months many more will.”

The Ernst & Young Item Club said rising unemployment was likely to slow the recovery in the fourth quarter of 2020 and that output would not get back to the level at the end of 2019 until 2024.

"The strength and sustainability of the UK‘s recovery will clearly be influenced by just how much unemployment rises over the coming months," Item's chief economic adviser Howard Archer said. "Many businesses have had very difficult times and this will likely limit their willingness to invest or to commit to major new projects for some time to come. The recovery is likely to be limited by persistent consumer caution, higher unemployment and only slowly recovering business investment."