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Explainer: Why is the UK suffering the worst recession of any G7 country?

The ailing British services sector has something to do with it.

Image: Dominic Lipinski

“HARD TIMES ARE here” UK chancellor Rishi Sunak warned yesterday after new data released by the Office of National Statistics revealed that Britain has officially been plunged into a recession after two consecutive quarters of economic contraction.

With GDP declining by a further 20.4% between April and June after a 2.4% shrinkage in the first three months of the year, the UK economy was the hardest hit of any of the G7 nations.

The 20.4% figure compares with economic contractions of 13.8%, 12.4%, 12.0%, 10.1%, 9.5% and 7.6% in France, Italy, Canada, Germany, the US and Japan respectively.

So what’s behind the latest figures?

It’s the services sector, stupid

Experts are highlighting the dramatic impact of the UK’s shutdown measures on the all-important services sector.

In the UK, output in the services sector declined by nearly 20% in the second quarter of 2020, representing around three-quarters of overall 20.4% drop in GDP.

Although output rebounded slightly in May and June, the report said that it remained “well below the February level before the main impacts from the pandemic were felt, resulting in the largest quarterly fall in services output on record”. 

This vulnerability was flagged in June by the Organisation for Economic Co-operation and Development (OECD), which predicted that the UK would be among the worst economic victims of Covid-19, worse, it said, than any of its European peers.

This, the argument went, is because Britain’s heavily service-oriented economy is particularly exposed to lockdown measures.

According to the ONS, the services sector — including the retail, financial and hospitality subsectors — represents around 80% of UK GDP.

For context, services represent about 60% of Ireland’s economic output. In terms of the overall size of the economy, a more accurate comparison would be France, another heavily services-oriented nation, where the sector accounts for about 78% of GDP.

But according to the latest data, French GDP fell by just 13.8% in the second quarter, driven in part by a decline in services output of 13.4%.

Why the discrepancy?

It probably has something to do with the timing and length of the lockdown periods in the two countries and its impact across different industries within the service sector.

For example, the French government ordered restaurants and bars to close on 14 March, reopening them gradually from late May and early June.

Britain, on the other hand, only shutdown its pubs and restaurants on 20 March and began lifting those restrictions on 4 July.

UK accommodation and food services output fell by an eye-watering 86.7% during the quarter but most businesses in the sector were still shuttered in June.

So, although output from other parts of the UK economy was on the rise in May and June, the services sector recovered at a slower rate, according to the ONS report. 

In fact, sectoral output increased by 7.7% in June, driven mostly by an increase in car sales. This compares to an 8.7% increase in overall UK output in June, driven by, among other things, an 11% increase in the manufacturing sector.

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Are there any other reasons for Britain’s declining fortune?

Plenty of them.

For example, analysts with Irish stockbroker Davy highlight the (predictably) dismal performance of the UK construction industry during the lockdown period.

Overall, British construction output contracted by 35% during the quarter after building sites were locked up and workers sent home in march.

New house-building dropped by over 50% in the quarter while new orders declined at a nearly identical rate.

Although activity in the sector rebounded from May to June by nearly 25% as restrictions were lifted, the level of output is still down 24.8% compared to the same time last year and down 26.2% from January. 

Manufacturing was another hard-hit sector of the economy.

As mentioned above, UK factory output was certainly on the incline in June as restrictions were lifted, production declined during the quarter by 20.2%.

Interestingly, although it was the single worst quarterly decline on record, the contraction is part of a larger trend — it actually was the fifth consecutive quarterly shrinkage in UK manufacturing output.

Brexit fears and general political uncertainty over the past 12 months had already been weighing heavily on British manufacturing before the outbreak of Covid-19.

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