UK business hopeful despite GDP plunge

Business leaders reflected an air of inevitability as official data on Wednesday showed the UK economy had officially entered recession in the second quarter of the year.

David Sapsted

12 August 2020

The coronavirus lockdown resulted in 20.4% GDP plunge in Q2 as household expenditure tumbled as shops were forced to close and as factory and construction output fell. However, data from the Office for National Statistics (ONS) showed the economy had started to bounce back in late May as lockdown restrictions eased and then recorded 8.7% growth in June.Alpesh Paleja, lead economist at the Confederation of British Industry (CBI), said the figures confirmed the "pummelling" the economy had suffered as a result of the essential public health measures put in place to contain the pandemic."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," he said."Encouragingly, the economy grew in May and June, indicating that the early stages of a recovery are underway. Yet cash-flow 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.”Fhaheen Khan, economist at the manufacturers' organisation Make UK, said the data only served to confirm "the extent of the economy’s plunge on to the rocks" in the first half of the year."While industry is seeing some signs of a recovery in demand, with manufacturing production seeing its largest increase since records began in 1968, the sector has been through a profound shock and the impact of which will continue to be felt for some time to come, especially with major redundancies coming through the pipeline which is going to remove significant spending power from the economy," he commented.“While some sectors of the economy are facing accelerated restructuring because of the pandemic, others which are fundamentally sound and which will be vital to our future growth in high value and high skill sectors will continue to be disproportionately impacted."We cannot afford to lose the talent in these sectors and, just as industry is having to be fleet on foot in a flexible approach to recovering and adapting, then government may have to be equally flexible to extending job support schemes in the same way as our competitors."Tej Parikh, chief economist at the Institute of Directors, said the figures reflected the painful reality households and businesses across the country had been experiencing. He said the battle now was to prevent longer-term "scarring" from the coronavirus-induced 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," Mr Parikh said."With flimsy balance sheets, directors will find it difficult to push ahead with any spending plans. Meanwhile, sales and operations will remain limited by the need for social distancing and ongoing uncertainty around the virus."Suren Thiru, head of economics at the British Chambers of Commerce, expressed particular concern about the effects the pandemic had had on the economically-dominant services sector.“While there was a pick-up in activity through the quarter from the historically weak April out-turn, this is more likely to reflect the release of pent-up demand as the economy gradually opened, rather than an indication of a sustained revival," he added.“With restrictions steadily easing, the second quarter is likely to prove to be the low point for the UK economy. However, the prospect of a swift ‘V-shaped’ recovery remains remote as the recent gains in output may fade over the coming months as the economic damage caused by the pandemic increasingly weighs on activity, particularly as the government support measures wind down."The ONS data was published after the latest, quarterly 'Labour Market Outlook' - produced by the CIPD (Chartered Institute for Personnel and Development) and the Adecco Group - suggested the jobs market would continue to shrink over the autumn.Based on interviews with more than 2,000 employers, the report said hiring intentions among firms were the lowest recorded since the survey was launched in its current form in the winter of 2012."Economic uncertainty will continue to weigh down pay, with the survey showing basic pay expectations among employers for the 12 months to June 2021 at a record low of 1%," added Gerwyn Davies, CIPD senior labour market analyst."This is partly due to a relatively large proportion of private sector employers that plan to introduce wage freezes during the same period. And many others are unsure of their future intentions."