Financial markets/economy

UK Experiences Largest Economic Contraction on Record

Posted by MoneyController on 15.02.2021

Britain’s economy narrowly avoided heading back into recession when it reported a 9.9% drop. European countries define a recession as two consecutive quarters of contraction but the UK, after reporting a 1% increase in GDP from October through December, is likely not to fall under this definition. 

Historical contractions

The current contraction of 9.9% is the largest since the Great Frost occured in 1709. That fateful year, the nation recorded low temperatures that haven’t been recorded since. The harsh weather caused many deaths and brought life to a standstill, hurting the economy in the process. To better understand the magnitude of this decline, it’s a contraction twice the size of the one that occurred following the financial crisis of 2008

Economic recovery

Dean Turner, of UBS Global Wealth Management, suggested the economy has the potential for a bounce-back as soon as restrictions on lockdown are eased. In fact, even during the lockdown, the economy hasn’t performed as badly as early last year. For instance, November 2020 only showed a 2.3% drop in output even though lockdown restrictions were in place. In December, the economy grew 1.2% making a quick recovery. All this shows that as soon as the lockdown is over, the economy can spring back into a quick recovery.

As it stands with the current restrictions and COVID-19 variant fears, the Bank of England has forecasted a 4% shrink in the economy. For the economy to recover to its pre-COVID levels, we may have to wait until early next year. That recovery, however, depends on the success of the vaccination drive.. The UK has vaccinated its residents at the fastest pace in Europe, which is a great achievement for the current government.

Finance Minister Rishi Sunak presents the budget on March 3 and faces tremendous pressure due to jobs lost to the pandemic. He has vowed to protect people’s jobs and extend the furlough scheme in next month’s budget. However, the government has already borrowed at record levels, and borrowing more might only be a short-term fix that may cause problems down the road.

According to figures provided by the OBS, the UK government is the closest to the pre-COVID levels as compared to Germany, France, and Italy. This should give the government some confidence heading into next month’s budget announcement.


 

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