PwC comments on revised Q1 GDP data

Dr Jonathan Gillham, PwC Chief Economist, comments on today's GDP data:

“UK GDP contracted by 2.0% in the first quarter of 2020, following flat growth in the final quarter of 2019 and 1.5% growth for the whole of 2019. Most economies have contracted in Q1 and reduction seems to be linked to the scale and timing of the respective lockdowns. Stricter lockdowns that were imposed once the virus was already spreading have generally resulted in greater economic cost, as in the case of the US (5.0%) and the EU-27 (3.2%).

“The Q1 decline in the UK is largely driven by reductions in household spending (-2.9%) and Gross Fixed Capital Formation (-1.1%, essentially investment). 

“Households are saving more (up 2.0% on the previous quarter) and spent around £9.5billion less (down 2.7%).This is the largest quarterly fall in household spending since quarterly records began in 1955. Households bought fewer cars, less clothing and the lockdown prevented them from staying in hotels and going out to restaurants. 

“Government borrowing rose to 4.4% of GDP (the largest increase since Q3 in 2013) primarily because of a sharp fall in VAT receipts and the introduction of the Coronavirus Job Retention Scheme (CJRS) at the back end of the quarter.

“This data highlights the unprecedented impact the lockdown had on the UK economy and shows the UK is heading into recession. Despite the gloominess, it is also broadly in line with expectations given the scale of the lockdown required to deal with the challenges presented by COVID-19. 

“Households increased saving by record amounts and cut spending at a rate not seen since 1979 towards the end of Q1, reflecting their nervousness around the effects of the virus. Businesses and Government also increased borrowing and financial institutions cut lending. There has also been a “dash for cash” as investors look for the safest and most liquid assets available.

“The publication of this data highlights significant downward revisions to monthly GDP series - the economy shrunk by 6.9% for the month of March - 1.1% more than initially expected. Measuring the size of the economy is incredibly difficult in these uncertain times, but from a strictly data perspective, the question is whether we might expect to see further downward revisions to the record monthly contraction of 20.4% that we saw back in April.”

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