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Hard times are here, says Rishi Sunak on UK recession – video

Covid-19: UK economy plunges into deepest recession since records began

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Britain has entered the deepest recession since records began as official figures on Wednesday showed the economy shrank by more than any other major nation during the coronavirus outbreak in the three months to June.

The Office for National Statistics (ONS) said gross domestic product (GDP), the broadest measure of economic prosperity, fell in the second quarter by 20.4% compared with the previous three months – the biggest quarterly decline since comparable records began in 1955.

After a decline of 2.2% in the first quarter, the figures confirm the UK economy plunged into recession after the Covid-19 outbreak spread in March and the government imposed a nationwide lockdown to contain it. Economists consider two consecutive quarters of shrinking GDP as the technical definition of a recession.

After resisting the launch of lockdown until later than other countries around the world and relaxing controls at a slower pace, the ONS said the UK had plunged into the deepest decline of any G7 nation in the second quarter. The downturn is also deeper than any other country in the EU and surpassed a 12.1% quarterly drop in the eurozone.

Warning that the government was making a historic mistake by winding down the furlough wage subsidy scheme as the country falls into recession, Anneliese Dodds, the shadow chancellor, said the downturn was a tragedy for the British people that had happened on Boris Johnson’s watch.

“The prime minister will say there’s only so much he could do during a global pandemic but that doesn’t explain why our economy is tanking so badly compared to other countries,” she said.

Britain’s decline was more than double the 10.6% fall in the US over the same period and also surpassed declines in France, Germany and Italy among G7 nations that have reported second-quarter figures so far. Canada and Japan have yet to publish second-quarter data but are not expected to record greater falls than Britain.

Rishi Sunak, the chancellor, said many people would lose their jobs in the coming months. “I’ve said before that hard times were ahead and today’s figures confirm that hard times are here,” he said.

“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.”

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What is a recession?

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One of the two main definitions of recession in the UK is at least two quarters of shrinking gross domestic product (GDP), the broadest measure of economic prosperity. Judged by this yardstick, the UK was last in recession in 2008-09, when there were six consecutive quarters of negative growth. 

The economic shock triggered by the coronavirus pandemic caused GDP to fall by 2.2% in the first quarter of 2020 and by 20.4% in the second – the sharpest decline since modern records began in 1955. 

Some economists believe this definition of recession is flawed, since an economy would not be in recession if it contracted by 5% in the first quarter, expanded by 0.1% in each of the following two quarters and then contracted again by 5% in the fourth quarter. It would, however, be deemed to be in recession if it grew by 5% in each of the first and fourth quarters but contracted by 0.1% in each of the second and third quarters.

An alternative – and tougher definition – is a full calendar year of negative output. Given the UK economy has grown on average by 2.5% over many decades, it is rare for gross domestic product (GDP) to fall on an annual basis. There have been only five such years since the end of the second world war: 1974, 1975, 1980, 1981 and 1991.

The US has its own method of assessing recession, with the National Bureau of Economic Research's business cycle-dating committee making a judgment.

The NBER defines recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales".

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Confirming the onset of the deepest recession since records began, the ONS said the decline in the second quarter was widespread, with a dramatic plunge in output across the services, production and construction industries. Reflecting the public health restrictions and forms of voluntary physical distancing in response to Covid-19, it said the pandemic had erased 17 years of economic growth in only two quarters – taking the level of GDP back to the equivalent position in June 2003.

Spending in the economy by households and businesses plunged by a quarter as lockdown measures forced people to stay at home, shops closed, building sites fell idle and factories paused production.

However, monthly figures for the economy indicate that an economic recovery from the pandemic strengthened in June as lockdown measures were gradually relaxed and pent-up demand fuelled a rise in consumer spending. GDP grew by 8.7% in June compared with the previous month – faster than expected by City economists.

The latest snapshot confirmed growth returned in May and strengthened in June, although not by enough to offset a dramatic collapse in output in April during the first full month of restrictions on business and social life, which was deep enough to push the economy into negative growth across the quarter.

GDP has grown 11.3% since the depths of lockdown in April but remains 17.2% below its level in February before the pandemic struck.

Jonathan Athow, the deputy statistician for economic statistics at the ONS, said: “The economy began to bounce back in June, with shops reopening, factories beginning to ramp up production and housebuilding continuing to recover. Despite this, GDP in June still remains a sixth below its level in February, before the virus struck.”

GDP graphic

Despite signs of a recovery taking hold, the shockwave triggered by the economic collapse is continuing to be felt, as unemployment begins to rise while businesses across the country struggle to stay afloat. Britain’s jobless rate is expected to more than double to the highest level since the 1980s before Christmas.

Sectors of the economy more reliant on social interaction – such as hospitality and leisure – suffered a steeper decline in activity than industries where homeworking and internet sales were able to increase in response. Food and drink sector activities fell by 84.7% as a result of the closure of bars and restaurants in the second quarter, while car sales and retail activity plunged by 63%.

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Business leaders warned the threat of a second wave in infections, local lockdown restrictions and Brexit uncertainty meant a sustained economic recovery was by no means assured. Economists also warned the pick-up in activity in May and June was predominantly driven by the release of pent-up demand and said growth could falter over the coming months as unemployment rises.

Alpesh Paleja, the lead economist at the CBI, said: “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.”

James Smith, the research director at the Resolution Foundation, said: “Although today’s data tells us that the economy is recovering as lockdown restrictions ease, it still has a long way to go. And that challenge will be bigger for the UK than for most other rich countries, given a larger economic hit.

“The longer-term impact of the crisis on living standards will depend on the scale of the rise in unemployment and how long it lasts. So the government’s priority should be providing support to those parts of the economy hardest hit by the crisis; supporting jobs while also helping those unlucky enough become unemployed.”

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