U.K. Economy Shrinks by More than Any Other Rich Country

U.K. economy shrank 20.4 % in the second quarter, equivalent to an annualized rate of 59.8 %

By guest author Jason Douglas from Wall Street Journal. Paul Hannon and Max Colchester contributed to this article.

The U.K. recorded a steeper second-quarter contraction than its peers, a performance that means it suffered the worst economic hit from coronavirus in Europe as well as reporting the highest death toll.

The economy is already recovering as restrictions on daily life ease and workers trickle back to factories and offices, recent data show, but Bank of England officials have warned that it could take until the end of 2021 to regain the ground lost during the pandemic.

The U.K. economy shrank 20.4 % in the second quarter, equivalent to an annualized rate of 59.8 %, the country’s statistics agency said Wednesday. Over the same period, the U.S. and Germany lost around 10 % of their output, with Italy losing 12 %, France 14 % and Spain 19 %.

“It’s been a rough few months,” said Richard Swart, global sales and quality director at Berger Global, a Durham, England-based unit of Germany’s Ringmetall AG that manufactures rings used to seal container drums. Sales in May and June fell between 20 % and 40 % depending on the industry being supplied, he said. Sales have since improved but remain sporadic, a sign of continuing uncertainty among customers, he said.

“Everybody clings to the hope that there will be a vaccine, that’s the ultimate fix,” Mr. Swart said.

The outsize hit reflects the timing and duration of the U.K.’s nationwide lockdown. Britain locked down late March, weeks after comparable European countries, and only gradually began easing restrictions late May. That meant the economy was shut throughout most of the second quarter, whereas Germany and other neighbors had already begun to reopen.

Another factor is the makeup of its economy. Compared with its peers, a larger share of the U.K. economy is devoted to activities that require close personal contact, which has been especially hit by measures to halt the spread of Covid-19, the disease caused by the virus. The BOE calculates that spending on such activities, such as going to the cinema or theater, eating out or attending live sporting events, represents around 13 % of total output in Britain, compared with around 11 % in the US and 10 % in the Euro Area.

Data Wednesday, August 5, 2020, showed household spending shrank 23.1 % in the second quarter compared with the first, while business investment fell by almost a third. Manufacturing and services output both fell by a fifth as factories idled and businesses closed.

Activity picked up in June as lockdown measures eased. The economy recorded growth of 8.7 % on the month, figures show, led by expansions in hospitality and construction.

Amid the downturn, the U.K. has, in common with other European countries, spent big to try to keep workers on payrolls. Around 730000 jobs have been lost since March, according to data Tuesday, but some 9.6 million employees who might have lost their jobs were instead on a government-backed furlough program.

The U.K. has recorded 46000 confirmed Covid-19 related deaths, the highest tally in Europe and the fourth highest in the world after the U.S., Brazil and Mexico. That is equivalent to almost 700 deaths per million residents, more than Germany, France, Spain, Italy or, on that per capita basis, the U.S.

Public-health experts say the high toll reflects factors including an aging and diverse population, as older people and some ethnic groups are more vulnerable to severe illness. Britain also has higher rates of obesity, diabetes and other illnesses tied to an increased risk of death than its European neighbors.

Some also pinpoint errors in policy, such as waiting too long to lockdown the economy and slowness in rolling out an effective test, trace and isolate program to hunt down new cases and stop the virus spreading.

“We responded really late, and in a chaotic manner,” said Linda Bauld, professor of public health at the University of Edinburgh. The U.K. government has repeatedly defended its pandemic response, saying it acted swiftly and in line with evolving scientific advice.

Prime Minister Boris Johnson’s Conservative Party continues to hold a comfortable lead over the rival Labour Party in the polls. The two main reasons for this: Firstly voters think that Mr. Johnson’s party can better manage the economy. Secondly, voters are proving forgiving over the government’s handling of the pandemic. “They are willing to give them the benefit of the doubt given the circumstances,” says Chris Curtis from pollster YouGov.

Still, the economy has now supplanted health care as the number one issue for voters in the U.K., according to YouGov, meaning Mr. Johnson’s political fortunes will depend on how quickly the economy recovers and whether the labor market holds up when employment-support programs end in the fall.

Another wrinkle: The BOE’s prediction for a protracted recovery assumes that free-trade talks with the European Union, due to wrap up this fall, conclude with a deal that smooths the final step of the U.K.’s EU departure. Britain officially left the bloc in January but remains a de facto member state until the end of the year. Failure to reach a deal risks disrupting trade with its biggest trading partner, potentially setting back any post-pandemic recovery.

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