FRIDAY, March 29, 2024
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U.K. economy's 20% record plunge adds pressure for more aid

U.K. economy's 20% record plunge adds pressure for more aid

The U.K. economy shrank a record 20.4% in April as businesses and workers reeled under the lockdown designed to control the coronavirus pandemic.

The contraction means the nation has effectively seen almost 18 years of growth wiped out in two months. While a rebound is likely as businesses start to reopen, the grim figures will increase the pressure on the government and Bank of England to do more to support the recovery.

The hit to the economy rounds off a difficult week for Prime Minister Boris Johnson, who is facing mounting criticism from politicians and scientific advisers after they blamed his Conservative administration for making a series of grave mistakes since the beginning of the outbreak.

In addition to registering the highest death toll in Europe, the U.K. has also paid an heavy economic price. The OECD says the country could see one of the developed world's deepest recessions in 2020, with output slumping more than 11% -- the most for more than 300 years.

"April was the first month to be fully encompassed by the lockdown. But these figures are nevertheless shocking, and it goes without saying that this kind of fall in activity is virtually unprecedented, either in scale or speed," James Smith, an economist at ING, wrote in a report.

Social-distancing rules and the prospect of a no-deal Brexit "all pose challenges to the U.K. economic recovery," and will keep the pressure on the BOE to increase its bond-buying program when it meets next week, he said.

That view is shared by most economists, who expect purchases to be stepped up by at least 100 billion pounds. Bank of America Merrill Lynch economists said Friday they expect a package of measures in August, including cutting interest rates to 0%, making the terms of a lending program more generous and possibly implementing a weak form of yield curve control, which would keep bond-market rates around a certain, low, level.

More support is seen as vital as the U.K.'s outlook darkens. Unemployment is widely expected to reach rates not seen since the mid-1990s, with more than 7,500 job cuts being announced on Thursday alone as the lockdown hammers businesses from chemical manufacturers to airports. That's despite massive government support that has left the taxpayer paying the wages of over 11 million people at a cost of 27 billion pounds ($34 billion) so far.

"We've always been in no doubt this was going to be a very serious public health crisis but also have big, big economic knock-on effects," Prime Minister Boris Johnson said in a TV interview Friday. "We have been very badly hit by this."

The damage in April was done by a 19% drop in the dominant services industry, where sectors such as air transport, travel agents and restaurants lost around 90% of their output. Manufacturing fell 24.3%, while construction plunged 40.1%. It means the economy was around 25% smaller in April than it was in February.

What Bloomberg Economists' Say

"The U.K.'s death toll is one of the highest in the world and that could mean spending remains subdued, even as the lockdown is eased further. Thought of another way, it could be that demand acts as the ceiling on activity as the economy starts to recover, not supply," Bloomberg senior U.K. economist Dan Hanson wrote.

"Unemployment, rising debt and business insolvencies will weigh on the recovery," Ian Stewart, chief economist at Deloitte, said. "The economy is unlikely to return to pre-Covid levels of activity until 2022."

Still, the pound was largely unperturbed by the plunge in output, which was expected by investors. It was up 0.1% at $1.2619 as of 12:00 p.m. London time on Friday.

Separate figures showed the trade deficit excluding volatile non-monetary gold and precious metals narrowed in April, with both exports and imports falling sharply as the pandemic disrupted shipment of cars, fuels, works of art and clothing.

 

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