HomeDisappointing GDP Out of the United Kingdom

Disappointing GDP Out of the United Kingdom

The Office for National Statistics (ONS) in the United kingdom released its GDP estimate for the month of May 2020 – showing a major disappointment. 

Instead of the expected growth of about 5.5% MoM, the United Kingdom’s economy barely showed a 1.8% increase.

This comes after April, where the GDP fell over 20%, it means that the current rebound is nothing but a small bounce that reveals the difficult road ahead to recover previous growth. Add to this the Brexit outcome uncertainty, and we have an explanation of why the GBP is one of the weakest currencies on the FX dashboard today.

Breakdown of the United Kingdom’s Economic Growth During COVID-19

A close look at the economic sub-sectors and at the rolling three-month growth rates, reveals that construction and services were hit the hardest. For example, the construction sector contracted by almost 30% in the three months leading to May 2020, followed closely by the index of services.

To have a better idea about the reality expressed by today’s data and why the GBP is down all over the dashboard, the following chart explains why even a positive release like the one from today looks insignificant. This is the monthly index from January 1997 to May 2020, and the small bounce of 1.8% for the month of May 2020 appears at the end of it. In other words, there is a tremendous distance from how the economy performed in February 2020 and how it did in May.

Yes, we should consider that the majority of the UK economy was in a lockdown mode. However, even with the lockdown fully lifted, it is difficult to imagine a full recovery in the period ahead, at least until the world finds a way to solve the COVID-19 crisis. In other words, we may consider the damage on the chart above as the coronavirus impact on the UK economic activity, and the level it bounced from the temporary bottom.

Moving forward, further improvement is expected. Food and beverages sector, for example, posted a decline of almost 70% as bars and pubs were closed – with their reopening, the numbers will look better.

But some activities are not going to recover to the level before the crisis. For example, the wholesale and retail trade and repair of motor vehicles fell by 71%, driven mainly by a reduction in new car registrations.

If we are to pick between the two, the former is likely to bounce harder than the later – yet both at much lower levels than February 2020, a crude reminder that the recession is here to stay for a while.

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