Opinion: All eyes on the lockdown quarter

As the Office for National Statistics confirms growth figures for Q4 2019 today (March 31), the next major announcement will be in early May when the Q1 2020 estimate is released. While this will be the first evidence of the impact COVID-19 is having on the real economy, Richard Dawson thinks we’ll have to wait until Q2 or the lockdown quarter to see how deep this recession will go

May 12 is the day given by the UK’s central statistical office, the ONS, for the first estimate of UK GDP in Q1 2020. This follows confirmation that GDP was flat, as in 0.0 per cent, in the final quarter of 2019.

Estimates and forecasts for Q1 2020 all point towards a contraction, somewhere in the region of -0.5 and -2 per cent. This will be the first sign that the economy is shrinking as a result of widespread closures in the retail, leisure, travel and hospitality sectors. March PMIs already tell us that business activity is falling at an unprecedented rate.

But the figures to be announced for the first quarter of 2020 are just the tip of the iceberg. It is only in the last month of Q1 (March) that businesses were affected by social distancing measures, with the Government lockdown only coming into force on March 23.

Of far greater concern is the trajectory GDP will take in the second quarter of this year, the lockdown quarter, when it is expected we will see the peak of the pandemic in the UK and the toughest social distancing measures to flatten it.

Forecasts vary as to how much UK GDP will shrink by in Q2 2020 but one particular study by the Centre for Economics and Business Research (CEBR) catches the eye.

The influential London-based think tank predicts that UK GDP will fall by a staggering 15 per cent in Q2. This would be by far the biggest quarter-on-quarter contraction since the ONS starting recording data in 1955 and in reality, would be completely unprecedented in world history.

As a point of reference, the worst quarter-on-quarter contraction in the 2008 crisis was 2.1 per cent, seven times lower than the CEBR projection for what is going to happen to GDP in April, May and June this year.

It is widely expected, however, that GDP will recover in Q3 as restrictions on UK businesses and the population begin to loosen and the public health emergency is brought under control.

But if the CEBR forecast is anywhere near accurate, if the whole economy does shrink by almost a sixth in a single quarter, it is going to take a phenomenal recovery in the second half of 2020 to get us back to where we were.

That recovery will be defined in principal by two key factors.

First is the number of businesses that go bust and the number of people made unemployed as a result of this crisis. Second is the Government’s ability to make both of those numbers as small as possible and to stimulate investment and consumption when normality returns.

It’s difficult to know how many businesses will never reopen their doors after being mandated to close them this month. But early analysis suggests that the UK unemployment rate could double to somewhere between 7 and 8 per cent this year.

Financial services firm Nomura predicts that joblessness could increase to 2.75 million in the UK. That’s 1.4 million more than at present, suggesting that thousands of businesses will collapse under the weight of this recession.

These figures are scary. Some of them are scarier than anything seen before in history. But we should be encouraged by the second factor – Government intervention.

Chancellor Rishi Sunak has already announced billions in cash grants to SMEs and hundreds of billions in loans to companies suffering from cashflow issues because of COVID-19.

The Treasury has also promised two unprecedented income support schemes for PAYE workers and the self-employed, in the hope of limiting the number of permanent layoffs and insolvencies.

These interventions should have a marked effect on the UK’s ability to recover from this crisis and, if the ‘whatever it takes’ approach is anything to go by, then hopefully we will see further measures to kick-start consumer spending and business investment in the second half of this year.

It is important to remember that we are only at the beginning of this journey. The forecast may look apocalyptic but only with time will we know how deep this will go.