The United Kingdom has officially fallen into a recession for the first time since 2009 – as the coronavirus pandemic continues to devastate the economy and business.
Defined as two consecutive quarters of economic decline, this is the first official recession since the economic crisis of 2009.
The UK economy suffered its biggest fall on record between April and June as the COVID-19 enforced lockdown measures drove the economy into a recession. The economy shrank 20.4% during this time – compared with the first three months of the year – showing the true impact of the lockdown. The economic decline was at its highest point in April. The economy actually grew by 8.7% in June, which built on a very slight growth the previous month.
Household spending plunged as shops were ordered to close, while factory and construction output also fell.
Chancellor Rishi Sunak announced that the economic slump would lead to more job losses in the coming months. This follows yesterday’s news that the number of people in work fell by 220,000 between April and June – the largest quarterly decrease since May to July 2009.
Sunak said: “Hundreds of thousands of people have already lost their jobs, and sadly in the coming months many more will. But while there are difficult choices to be made ahead, we will get through this, and I can assure people that nobody will be left without hope or opportunity.”
The Office for National Statistics (ONS) revealed that the economy bounced back in June as government restrictions on the movement started to ease, however, they would not rule out the possibility of a third quarter decline. This is due to the ongoing impact the virus is having on major sectors such as retail, manufacturing, leisure, travel and transport.
Jonathan Athow, Deputy National Statistician for Economic Statistics, said: “Despite this, gross domestic product (GDP) in June still remains a sixth below its level in February, before the virus struck.”
Responding to latest official figures showing GDP fell by 20.4% in the second quarter of 2020, 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.
“Job losses have been mounting, and may only increase as we reach the end of the furlough scheme. The pile of debt businesses have had to take on could also cause a lasting hangover. With flimsy balance sheets, directors will find it difficult to push ahead with spending plans. Meanwhile, sales and operations will remain limited by the need for social distancing and ongoing uncertainty around the virus.
“The Chancellor must respond now with measures to support jobs by cutting the cost of employment, for instance by reducing employers’ National Insurance Contributions. By the Autumn, it might be too late to have greatest effect. The Treasury should also explore options for restructuring business loans, while targeted grants to help SMEs adjust to the new normal would bolster the Government’s aim of reopening the economy.”
Mariano Mamertino, Senior Economist, LinkedIn, said: “Today’s figures are a sobering reminder of the havoc the pandemic is wreaking on the UK economy. And whilst economies across Europe are also now in a recession, the UK has experienced one of the biggest growth contractions over the last quarter. This is in part because the UK locked down later than other European nations, and so makes today’s figures even starker.
“It’s worth noting that even though employment is declining, job losses have been relatively moderate when compared to the large falls we are seeing in GDP. While the June rise in GDP offers some green shoots of recovery, and LinkedIn’s latest data shows that hiring in the UK is improving, GDP is still well below pre-COVID levels and will take time to come back.”
Alpesh Paleja, CBI Lead Economist, said: “This confirms the economic pummelling from the essential public health measures put in place to contain Covid-19. With people’s movement restricted over the second quarter, it’s unsurprising that sectors like hospitality, arts and entertainment felt the full brunt of lockdown.
“Encouragingly, the economy grew in May and June, indicating that the early stages of a recovery are underway. Yet cashflow constraints are still biting hard for businesses, and with the pandemic not going away anytime soon, a sustained recovery is by no means assured.
“The dual threats of a second wave and slow progress over Brexit negotiations are also particularly concerning, underlining the need for maximum agility from Government on both these issues, allowing a greater focus on the economy’s long-term future.”
Michael Buckworth, Managing Director of Buckworths, a law firm working exclusively with start-ups and high growth businesses, said: “The worst kept secret in the country is out – the UK has joined the US and Eurozone in entering a recession. This outcome has been consistently predicted since Boris Johnson ordered the UK indoors on March 23rd. But, frighteningly, an unprecedented collapse in GDP and doomsday economic prophecies have been the only consistent message coming from the Government since the crisis began.
“It’s almost five months since Boris Johnson’s announcement on that fateful Monday, and yet the Government can’t seem to stick to the same message for longer than a week. The latest example of this being the threat to close pubs if schools reopen – which came less than a month after the Chancellor announced the ‘Eat out to help out’ scheme to ‘support restaurants and the people who work in them’. Worse still, this ill-thought-out threat to close pubs and restaurants comes while the furlough scheme is winding down, leaving business owners with little choice but to make redundancies.
“The Government must realise that words have consequences and that their inconsistent messaging is creating a cycle of uncertainty, which is the biggest risk to businesses. Although entering a lockdown made a recession inevitable, the Government still has the chance to impact how long and vast this recession will be. They need to urgently get a handle on their messaging, support businesses and encourage customers to spend again because right now the government is killing the economy just as much as COVID-19.”
Andrew Harding, FCMA, CGMA, Chief Executive — Management Accounting, The Chartered Institute of Management Accountants, part of the Association of International Certified Professional Accountants, said: “This morning’s news that our country has entered its deepest recession on record shows that we are still a long way off from economic recovery. Despite the Government’s efforts, we can no longer hope for a swift V-shaped recovery and must brace ourselves for the challenges ahead.
“The Government must focus on delivering a long-term economic strategy to help put the UK back on a sustainable, sound footing and tackle the systemic challenges it faces which this crisis has only exacerbated (e.g. low productivity, high dependency on low-skill service sector jobs, regional imbalance, and weak social mobility).
“To address this, the Government must deliver support in key areas including cutting employers’ national insurance bills to help keep people employed and create new jobs, identifying and directing skills training towards jobs and sectors with real-wage growth potential, and designing appropriate measures to support SMEs and new startups, such as creating a new Growth Accelerator Scheme.”
Do SMEs have the answer?
Figures released this morning have confirmed what economists have feared since the beginning of lockdown – that the UK has now entered a technical recession after two consecutive quarters of economic decline. The ONS did, however, confirm that the economy grew in June as lockdown restrictions began to be lifted.
One area of rapid recovery will come from SMEs. A recent survey indicated that 60% of SMEs in the UK are optimistic about the future of their business – a sign that these ambitious firms will be looking to grow after the impacts of COVID-19 begin to dissipate. SMEs make up 99.9% of private sector businesses and with such a significant portion of firms able to adapt quickly, growth in this sector could be rapid.
Small firms already employ over 16million people in the UK and before coronavirus the sector was growing at a faster rate than the overall job market. A return to this would provide a welcome boost. There has already been significant support for SMEs from the government in terms of loans and more recently a £20m grant program to help firms tackle issues arising from Coronavirus.
Luke Davis, CEO of IW Capital and private equity expert, discusses the importance of SME growth to economic recovery: “These figures are not wholly surprising given the catastrophic impact that lockdown had on many business. The word recession in the context of previous years is normally a by-word for low confidence, but in this case that is not necessarily true. Many firms are optimistic about their prospects and want to grow. Resilience is an important part of any business and firms that have survived this period will now be looking forward to growth and opportunity.
“Opportunity comes out of crises, the global financial crash of 2008 led to the creation of the FinTech industry that is now one of Britain’s most successful sectors. There will undoubtedly be firms and sectors that will go on to make this impact. If current conditions persist – and there is no second wave – I would be surprised if the recession continues into next quarter.
“The small business community and its success is as important to the economy as anything else in the near future. With an economic contribution of over £2tn, the success of the UK economy as a whole may in future hinge on the prosperity of SMEs, start-ups and high-growth firms. There are a fantastic range of innovative, growing SMEs that we work with which are likely to drive our private sector forward in the coming years.”