Business

UK economy hit by sharpest fall in 41 years amid Covid-19 crisis

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Britains economy contracted by 2.2% in the first three months of 2020 – its sharpest decline in more than 40 years – as the immediate impact from the Covid-19 pandemic provided an even more severe hit to output than first thought.

Fresh data from the Office for National Statistics showed that gross domestic product fell by 6.9% in March, even though the government-imposed lockdown only came into force with nine days left of the month.

Original estimates by the ONS had shown that the economy shrank by 2% in the first quarter as a whole and by 5.8% in March.

New evidence found, however, that the closure of bars, restaurants and shops had an even bigger impact on consumers than the ONS had estimated. The 2.2% drop was the joint biggest since the third quarter of 1979.

With people unable to spend their wages, the ONS said household consumption spending fell by 2.7% between the fourth quarter of 2019 and the first quarter of 2020. The £9.5bn fall in cash terms was the largest nominal fall on record, with big drops reported in spending on cars, eating out, hotel visits, and clothing and footwear.

Broken down by sector, the ONS said the impact of the lockdown had been most severe in services, which make up 80% of the economys output. The decline of 2.3% in the first quarter was 0.4 points bigger than first thought. Production output dropped by 1.5% – mainly as a result of factories being shut – while the closure of building sites led to a 1.7% drop in construction.

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The ONS said there was also a jump in the household savings ratio – the proportion of income saved rather than spent – from 6.6% to 8.6% in the first quarter.

Government spending adjusted for inflation dropped by 4.1% in the first three months of the year, reflecting lower use of public services caused by schools being shut and hospitals postponing non-essential work.

The first-quarter figures leave the UK on course for its deepest recession in modern times. The ONSs flash estimate for April found that the first full month of lockdown resulted in a drop of output of just over 20%.

Jonathan Athow, the deputy national statistician at the ONS, said: “Our more detailed picture of the economy in the first quarter showed GDP shrank a little more than first estimated. This is now the largest quarterly fall since 1979.

“Information from government showed health activities declined more than we previously showed. All main sectors of the economy shrank significantly in March as the effects of the pandemic hit.

“The sharp fall in consumer spending at the end of March led to a notable increase in households savings.”

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