Economics: Record economic contraction in 2020

Date : 12 February 2021

ONS has published its preliminary estimate of UK economic output in Q4 2020, meaning that it is now possible to assess performance over the whole year.

As might be expected, the full-year statistics make grim reading, with real GDP down 9.9% versus 2019 – the worst annual performance on record.

The second quarter was the weakest, by a considerable margin, suggesting that the major cause of the economic downturn was Coronavirus, rather than EU Exit.

(The latter might actually have boosted output, if UK businesses built-up stocks in anticipation of supply chain disruption).

The first phase of lock-down had more severe economic impact than the second and third, possibly because consumers and businesses learned to accommodate the effects by the end of the year.

ONS notes that business investment in 2020 was very weak, reflecting high business uncertainty and increasingly difficult financial challenges.

Capital spending tended to be limited to maintenance and non-discretionary projects, with more speculative or adventurous investments on hold.

Low capital spending may contribute to economic “scarring” in the long term, a point also picked-up by the Bank of England in its February Monetary Policy Report.

The Bank, however, was more optimistic about the economic outlook for 2021, anticipating a strong recovery, although economic damage done by Coronavirus is likely to be permanent.

Source: ONS, February 2021

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