The UK economy shrank more than initially estimated in the first quarter of this year, recording the largest fall since 1979 as coronavirus choked activity in March, with household savings soaring.
Output in the UK dropped 2.2 per cent in the first quarter compared to the previous three months, according to revised data from the Office for National Statistics. This is a sharper contraction than the first estimate of 2 per cent. The quarterly fall in UK gross domestic product is now the joint largest since the third quarter of 1979.
“Our more detailed picture of the economy in the first quarter showed GDP shrank a little more than first estimated”, said Jonathan Athow, deputy national statistician at the ONS. “All main sectors of the economy shrank significantly in March as the effects of the pandemic hit . . . The sharp fall in consumer spending at the end of March led to a notable increase in households’ savings.”
The revision was largely driven by household consumption, which declined 2.9 per cent in the first quarter, 1.2 percentage points lower than the initial estimate.
According to the ONS, this is the largest quarterly fall in nominal household spending recorded, with large falls in expenditure on motor vehicles, restaurants and hotels, and clothing and footwear. It reflects the closure of non-essential shops, accommodation and food services businesses.
With spending limited by restrictions, the household saving ratio — the average percentage of disposable income that is saved — increased to 8.6 per cent in the first quarter, from 6.6 per cent in the previous quarter.
High household savings could trigger a faster recovery if spending resumes once the economy reopens, or might slow it down if households continue to save because of employment uncertainty.
The higher household saving rates “will provide some welcome support to consumers, although analysis indicates that it is the least well-off that have tended to find their finances increasingly squeezed during the second quarter”, said Howard Archer, chief economic adviser at the EY Item Club, a consultancy.
Output in the services sector fell 2.3 per cent in the first quarter, a 0.4 percentage point downward revision. While all services activities registered a contraction, growth in public services declined more than previously estimated. Health and social work output is now estimated to have fallen by 4.2 per cent, while education output is now estimated to have fallen by 6 per cent in the first quarter.
The ONS has also already released its first estimate of monthly GDP change for April, recording a 20.4 per cent plunge compared to March. This was the largest contraction since monthly records began in 1997 and followed a 5.8 per cent contraction in March, the previous record fall.
Since then, economic sentiment and retail sales data have recorded an improvement in activity reflecting the gradual reopening of the economy. However, “it will still take the economy until 2022 before it regains its pre-crisis level”, said Thomas Pugh, UK economist at consultancy Capital Economics.
The pandemic has made it difficult to produce standard economic data, and GDP estimates have been subject to large revisions in all major economies. France and Italy both contracted 5.3 per cent in the first quarter, according to revised figures, 0.5 percentage points milder and 0.6 percentage points sharper than initial estimates respectively.
The UK contraction in the first quarter is milder than the 3.6 fall in the eurozone, largely reflecting a later lockdown. However, restrictions have been in place for longer in the UK than in most eurozone economies, pointing to a sharper fall in the second quarter.
Source: Economy - ft.com
