The U.K. economy suffered more than any major European nation during the coronavirus lockdowns, piling pressure on the government to ensure the withdrawal of its support programs doesn’t derail the nascent recovery.
Gross domestic product plunged 20.4% in the second quarter, the most since records began in 1955 and roughly double that of Germany and the U.S. It also pushed Britain into its first recession since 2009.
The report followed massive job losses since the start of the pandemic, and Chancellor of the Exchequer Rishi Sunak acknowledged that more pain is to come.
“I’ve said before that hard times were ahead, and today’s figures confirm that hard times are here,” he said following the release. “Hundreds of thousands of people have already lost their jobs, and sadly in the coming months many more will.”
That casts a light on the risks of winding down government support for companies and workers too soon. Almost 10 million jobs have been put on furlough programs under which the government pays the wages. Sunak, who has borrowed tens of billions of pounds to finance spending, insists the time has come to start phasing the plan out, although his critics say it should be extended.
“Sunak has got a tricky job,” said James Smith, developed markets economist at ING. “There’s no easy answer to the Job Retention Scheme and that’s the main risk at the moment as that is unwound. There’s a real chance that the recovery stalls if unemployment broadens out.”
A rebound is under way — U.K. output jumped a record 8.7% in June, beating forecasts — but high frequency data such as credit card spending and electricity use are still well below pre-pandemic levels. They’ve more or less recovered in other major European economies, according to Bloomberg Economics.
The finance minister blamed the composition of the U.K. economy, for the “outsize” scale of the hit the U.K. has suffered, compared to other countries.
“Social activities, for example, going out for a meal, going to the cinema, shopping, those kinds of things comprise a much larger share of our economy than they do for most of our European comparison countries,” Sunak told Sky News.
Still, there are other worrying signs that the upturn could soon run out of steam.
Localized jumps in infections have heightened concerns over more shutdowns, government wage support is being phased out, and companies face higher tariffs should Britain fail to agree a trade deal with the European Union by the end of the year.
Economists and investors expect the Bank of England to boost its monetary stimulus later this year by increasing bond purchases. The central bank has already pumped billions of pounds into the finan
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