After a decade of anaemic if consistent economic growth, the UK is now heading for its first official recession since 2009. GDP fell by 2.0 per cent in the first quarter of this year (January to March) despite the lockdown only beginning on 23 March.
On a monthly basis, GDP fell by 5.8 per cent in March, the largest monthly fall since records began in 1997. Services (-6.2 per cent) and construction (-5.9 per cent) also endured record declines. GDP is an imperfect measure but it is the first official indicator of the scale of the economic shock approaching the UK.
The Bank of England has forecast the worst recession since 1706 with GDP falling by 25 per cent in the second quarter of this year (a recession is defined as two consecutive quarters of negtive growth) and by 14 per cent across the year, and unemployment doubling to around 9 per cent.
Even before Covid-19, the British economy was perilously fragile. GDP failed to grow in the final quarter of last year and annual growth was just 1.4 per cent. A decade of austerity and anaemic wage growth (average real earnings remain below their 2008 peak), meanwhile, has left households with few reserves to fall back on.
The fall in GDP will prompt further calls from Conservative MPs and commentators for the lockdown to be significantly eased. But this would be to put economic growth before public safety. Rather, the figures show why the government must maintain essential support such as the Job Retention Scheme (which Rishi Sunak yesterday extended until the end of October). Though UK unemployment is rising, it is not doing so as fast as in the US (where joblessness has already reached 14.7 per cent).
As the scale of government borrowing required becomes clear – the deficit is forecast to exceed £300bn – ministers will be forced to consider other radical interventions such as monetising debt through Bank of England money creation (though borrowing costs remain ultra-low) and, once the immediate crisis has passed, imposing tax rises on the wealthy.
What the UK should not do is prepare a new austerity programme (as 12 leading economists recently argued in the NS). The enduring shock to economic supply and demand from Covid-19 will be far beyond anything experienced in the 2008-09 recession. Governments must act as spenders of last resort and central banks as lenders of last resort. Austerity was reckless in 2010, but it would be even more so now.