The chancellor has said it is “very likely” the UK is in a “significant recession”, as figures show the economy contracting at the fastest pace since the financial crisis.
The economy shrank by 2% in the first three months of 2020, as coronavirus forced the country into lockdown.
Rishi Sunak told the BBC that just “a few days of impact from the virus” in March pushed the economy into decline.
Economists expect an even bigger slump in the current quarter.
Mr Sunak said: “It is now very likely that the UK economy will face a significant recession this year, and we’re already in the middle of that as we speak.”
The first quarter drop was driven by a record fall in March output, and comes after the economy stagnated in the final quarter of 2019.
Ruth Gregory, senior UK economist at Capital Economics, said the figures showed the UK economy was “already in freefall within two weeks of the lockdown going into effect”.
She added: “With the restrictions in place until mid-May and then only lifted very slightly, April will be far worse.”
While analysts expected a larger quarterly decline of 2.6% in the first three months of the year, it still represents the biggest contraction since the end of 2008, when the world’s major economies sank into recession.
To put the fall in context, Ms Gregory said that “in just one month the economy has tumbled by as much as it did in the year and a half after the global financial crisis”.
That crisis, sparked by over-zealous lending and heavily-indebted businesses and consumers, led governments to impose austerity measures lasting years.
In 2008, the UK bailed out some major banks by taking multi-billion-pound stakes in them. But without access to state support, many companies folded.
The lockdown measures announced by Mr Sunak mark a more radical intervention in the economy, with the state paying the wages of vast swathes of the workforce and guaranteeing loans to businesses.
The Office for National Statistics (ONS) said there had been “widespread” declines across the services, manufacturing and construction sectors.
This includes a record 1.9% fall in services output, which includes retailers, travel agents and hotels.
Household spending shrank at the fastest pace in more than 11 years as restaurants and high street shops remained shut.
The ONS said a rise in spending on food, alcohol and new TVs only partially offset the decline.
On Wednesday, the government stepped in to underwrite trade credit insurance, to ensure the insurance market can continue to function.
The insurance is taken out by companies to enable them to avoid the financial impact if the firms they do business with collapse before they have paid for goods or services.
According to recent data from Morgan Stanley, insurers worldwide could have to pay up to $46bn (£37.6bn) in trade credit insurance claims due to the coronavirus lockdown.
Insurers had warned the government that they might not be able to survive if they have to pay out huge claims due to struggling British businesses failing to pay their bills.
The figures come as some of the lockdown restrictions are starting to be eased. Some employees in England who cannot work from home are now being encouraged to return to their workplaces.
Sectors “allowed to be open, should be open”, the government says. These include food production, construction and manufacturing.
‘We will survive’
Like so many companies, Spinder could not operate in a world of social distancing – but the founder has re-invented the business.
Formed more than three years ago by Rich Allsop, Spinder is a London-based gym and exercise class aimed at the gay community.
“Things changed very quickly in mid-March,” he says. “The full lockdown hit, and Spinder in its pure form had to end. I refused to give in. I refused to let my business and livelihood die and our wonderful community disperse.”
Within 24 hours he re-imagined what Spinder classes could be in an online world, and SpinderCast was born.
“I was pleased to see that a lot of the regulars have come with me. Now that we are online, our classes are even more accessible, attracting members from all over the UK and as far away as Cape Town.”
He’s no plan to give up on the gym studio itself, “as everyone keeps telling me how they can’t wait to get back”.
But Mr Allsop is worried about the financial impact of recession on customers. “We’ll see how we can pull together to help them continue to attend our classes,” says.
Still, the lockdown crisis hasn’t ended his business, but created a successful offshoot. “The strength and support of Spinder’s community and the Spinder brand means we will survive,” he says.
In other developments, estate agents in England can now reopen, viewings can take place and removal firms and conveyancers can re-start operations, so long as social-distancing and workplace safety rules are followed.
On Tuesday, Mr Sunak announced an extension of the furlough scheme subsidising wages to the end of October.
Mr Sunak said Wednesday’s GDP data underlined why the government had taken “unprecedented action” to support jobs, incomes and livelihoods” at a time of severe disruption.
France and Italy saw much bigger contractions of 5.8% and 4.7% respectively in the first quarter, where lockdowns were imposed up to two weeks earlier.
However, analysts expect a double-digit drop in UK gross domestic product (GDP) in the coming quarter.
The Bank of England has warned that the UK economy is likely to suffer its sharpest recession on record this year, even if the lockdown is completely lifted by the end of September.
While the Bank said the economy could shrink by 14% in 2020, it expects the downturn to be short and sharp, with growth of 15% predicted in 2021.
The decline is also expected to be less prolonged than during the financial crisis, when the economy kept shrinking for more than a year.
The economy also took five years to get back to the size it was before the meltdown.
The Bank of England expects the UK to rebound more quickly this time, returning to its pre-crisis size within two years.
Today’s figure shows that the UK economy has already undeniably entered recession, although that will not be officially confirmed until August.
In and of itself the loss of 2% of the value of the economy in one quarter is very rare, it is one of the five worst three month periods since modern records began in 1955.
But this was the consequence of an already stagnant economy hit by just over a week of official shutdown at the end of March.
That led to a record monthly fall in the economy of 6%, about the same fall seen over a much longer period in the last recession in 2008.
It means that the current second quarter between April and June is set to see truly incredible record falls in excess of of 20 to 30% – perhaps a quarter of the whole economy.
The chancellor said that it was too early to speculate on the shape of any rebound, but fears are growing that it can no longer be presumed as rapid.
And as welcome as the unprecedented support has been, the government is likely to come under pressure from industry over further support, delaying travel quarantines, and the need for a post Brexit trade deal.
The global economic impact of the crisis was underlined on Wednesday in a report by the United Nations Conference on Trade and Development (UNCTAD),
It warned that world trade in goods is set to slump at a rate not seen since the global financial crisis in 2009, with estimates becoming increasingly gloomy over the past weeks.
Trade is seen down 3% in the first quarter from the final three months of 2019 and by a further 26.9% in the second quarter, UNCTAD said.
“There were falls of a similar magnitude in 2009 during the global financial crisis, although the decline was not as steep as in 2020. At that time, global trade rebounded just as quickly, in line with global economic recovery,” UNCTAD said.
Are we sure about these UK GDP figures?
No, we’re not, although we can be pretty sure that the lockdown has been bad for the economy overall. This is the first estimate of the change in the value of stuff produced by the UK economy, measured by gross domestic product (GDP), between January and March.
The first estimate is published pretty soon after the end of the period it is measuring, and it tends to rely on more reliable data for the first couple of months of the quarter-year, and less on what happened in the third month.
That’s a problem for this set of figures, because the period we are most interested in is the last week in March, when lockdown had started.
Also, a lot of the data behind these figures comes from surveys, and the ONS says that as a result of the coronavirus measures, fewer companies responded to its surveys.
And the ONS is facing just the same challenges when doing its work as any other business. It warns that this estimate is “subject to more uncertainty than usual”.