The UKs economy has officially entered the “largest recession on record”, according to official figures charting the impact of the coronavirus crisis on the economy. The Office for National Statistics (ONS) reported that the enforced hibernation of activity through the COVID-19 lockdown meant gross domestic product (GDP) slumped by 20.4% in the second quarter of the year following a dip of 2.2% during the first three months of 2020 triggering a Covid financial crisis.
Largest Recession on Record
The economy has once again entered recession, for the first time in twelve years, since the financial crisis in 2008. The outbreak of Covid19 in 2020 caused businesses to shut their doors and pushed the workforce into staying at home between March to June. The total number of unemployed has more than doubled, rising to 2.7 million since March and is rising at a faster pace than in the wake of the 2008 financial crisis, according to the ONS and the government warns there will be many more casualties over the remainder of 2020 and well into 2021.
Further to announcing the UKs largest ever recession, Chancellor Rishi Sunak stated, “I’ve said before that hard times were ahead, and today’s figures confirm that hard times are here.” The economy shrank 20.4% compared with the first three months of the year which has forced the UK into its first technical recession – defined as two consecutive quarters of economic decline – since 2009. The services sector, which powers four-fifths of the economy, suffered the biggest quarterly decline on record.
The economic decline that triggered the largest ever recession was concentrated by activity in April, at the height of lockdown. Official jobs figures released on Tuesday 11th August showed the number of people in work fell by 220,000 in April to June. In response to confirmation of the largest ever recession, the Chancellor said the government should not pretend that “absolutely everybody can and will be able to go back to the job they had,” and said there would be support for creating jobs in new areas. He has also said there will be a “fiscal event” in the autumn. Responding to reports that the planned Budget could be abandoned in fear of a second wave of the pandemic triggering further economic uncertainty. He added that there would not be a return to austerity – but acknowledged that public spending had taken a huge hit and there would be difficult choices ahead.
The economic shockwaves that have caused the largest ever recession, resulting from the pandemic are showing curious changes in the way the public is spending. A spike in online sales was to be expected, but high streets are showing extreme variations regionally. Social distancing measures and the closure of childcare settings moved a huge percentage of the workforce over to working from home for an extended period, which has influenced changes in spending behaviour and a further shift away from the high street since 2009. Retailers with branches in a range of demographic settings are said to be experiencing extremely low sales in urban spaces that have been left devoid of office workers and tourists, whereas more ‘local’ village locations are seeing an uptick in average takings, due to workers giving up their daily commute into city centres, and instead staying home and shopping nearby. This factor impacting the largest ever recession is likely to diminish over time if schools successfully reopen and places of work can adjust to accommodate social distanced working methods. But businesses will need to take measures to weather the current economic climate.
The Government has confirmed it is considering a sweeping new tax on goods sold online in the wake of the “significant” hit to the high street from Covid-19. On Monday 22nd July, The Times reported that the Chancellor was considering a levy on internet shopping to help bricks-and-mortar stores compete with internet retailers. It comes after the Treasury highlighted concerns in a call for evidence last week that business rates were harming the high street because online rivals did not need to rent “high-value” properties. A Number 10 spokesperson said: “Last week as we set out in the Budget and manifesto we published a call for evidence to look into all aspects of the business rates system. “And as part of this we will consider the case for introducing alternative taxes as part of the review, including an online sales tax.
One factor suggested to have influenced the largest ever recession, is the pressure on the UK’s extensive consumer services, that have traditionally relied on face-to-face contact, which simply wasn’t possible under lockdown conditions. However critics widely agree that the UKs largest ever recession results from the government’s initial hesitation to lockdown. Plus a lack of speed in implementing other measures to prevent widespread cases of the virus, which caused the country’s lockdown to last longer than it necessarily could have, had the UK’s response to the pandemic been enacted differently.
A business survey by the ONS conducted in the last two weeks of June showed 89% of UK businesses were trading, with another 4.3% planning to start trading within the first half of July, responding to the winding back of the treasury’s furlough scheme. Apparently half of businesses in the accommodation and food sector were open for trading at that point, as were 39% of businesses in the arts, entertainment and recreation sector. The largest share of workers who have been returned from furlough, are those working in the hospitality, and the arts and entertainment sectors, according to figures.
In its update on the economy on Wednesday 12th August, the ONS pointed to a record fall in productivity during the second quarter of the year. It measured that output per worker fell by a fifth compared with the first three months of 2020. ONS deputy national statistician Jonathan Athow said: “The recession brought on by the coronavirus pandemic has led to the biggest fall in quarterly GDP on record. “The economy began to bounce back in June, with shops reopening, factories beginning to ramp up production and house-building continuing to recover. “Despite this, GDP in June still remains a sixth below its level in February, before the virus struck. “Overall, productivity saw its largest-ever fall in the second quarter. Hospitality was worst hit, with productivity in that industry falling by three-quarters in recent months.”
Boosting the Economy
The prolonged closure of businesses most severely impacted retail, travel, hospitality and leisure sectors during the implementation of full lockdown measures, triggering the largest ever recession. Despite government voucher schemes such as so called Eat out to help out, announced by the government in an effort to boost trade in this sector. Widespread unemployment has arisen due to the largest ever recession following the winding down of the furlough scheme. This demonstrated an overall dampening of consumer spending. As consumers defer discretionary spending and observe social distancing, which sees restaurants serving numbers of covers that are at least halved in most cases. Additionally pre-booking systems mean that friends from different households are less likely to spontaneously spend, contributing to the largest ever recession. Businesses across all sectors, from the most severely affected, through to those more capable of recovery, are affecting trade for one another within the economic food chain. The first businesses to cautiously reopen are responding in creative ways to their new market position, in the aftershock of a globally indiscriminate pandemic.
Ever adapting solutions to social distancing are being trail-blazed by restaurateurs and retailers UK wide. Whereas leisure and recreation businesses are seeing wide ranging disparities between those who are able to open their doors, and those held back by difficulties finding affordable measures to enforce social distancing and sustain even a break even income during the largest ever recession. Cinemas, theatres, leisure centres and temporary events in particular are struggling to balance potential ticket sales under social distancing, with attracting satisfactory investment from skittish sources that are struggling to predict sufficient return on investment (ROI) during the largest ever recession. The longer that public venues and temporary events remain off limits, the harder it will be for those existing businesses to bounce back, or to retain highly skilled staff. Types of business that require advanced ticket sales for an event that may or may not run at a scheduled time are in advanced jeopardy. Particularly those with long lead times like UK entertainment heavyweight Glastonbury Festival and Canada’s Cirque du Soleil, which has had to shed thousands of staff to avoid bankruptcy. Plus honouring paid up ticket holders for events that didn’t run in 2020, with dwindling prospects of reopening this year or next under fears of a second wave during the largest ever recession.
The ONS charts the effects of the deep freeze imposed on the economy affecting the largest ever recession amid fears a crisis for employment has barely begun. July showed 730,000 fewer people on payrolls since the lockdown started. John Lewis, Boots, M&S, British Airways, WH Smith and Debenhams have been among a wealth of well-known high street retailers cutting jobs to date, to avoid bankruptcy.
Then there’s stock that has been “poured away” unsold, since the time that lockdown started. Many businesses have faced supply chain disruption when suppliers paused manufacturing in response to lockdown restrictions. Have you noticed your supermarket’s packaging gradually changing over the weeks since lockdown began? This is a supply issue that energy and investment has been dedicated to over marketing practices, which is also a rapidly declining industry contributing to the largest ever recession. Trade routes suffered blockages with goods and materials trapped at sea along with their crew during the deepest cutting section of lockdown. Due to disruption to shipping, docking and operations caused by international quarantine measures. Hopefully these effects are expected to diminish over time as more businesses find the means to resume trading. However related to this, the blanket shutting down of businesses has resulted in weak demand. Which is likely to be the biggest overarching negative impact on the economy, from slow growth in the UK and globally, causing the largest ever recession. Significantly reduced levels of business and consumer confidence results in a sharp and sustained downturn in business investment.
Tax revenues continue to show an impact from COVID-19, with VAT receipts around 45% lower than June 2019. With an increase in government expenditure in response to the pandemic, borrowing in the first quarter of 2020/21 was more than double the amount for the whole of 2019/20. As a result, the decline in public sector net debt as a percentage of GDP has reversed sharply. However, despite borrowing roughly five times as high in June 2019, the trajectory does seem to be slowing, after peaking with record figures in April and May.
The UK government has increased the scale of government expenditure and fiscal support to help businesses and workers, in the form of the extensive working capital / cash flow support to businesses through tax / payment holidays, grants and loan guarantees. All of which should be taken advantage of, to help your business survive and thrive. We are always happy to chat through the options available.
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