The bulk of the pain of Q2’s slump in GDP had been borne by the government rather than households and businesses. But with the recovery already flattening off, fiscal support fading and the full scale of the fallout in unemployment yet to be felt, that will change in the second half of 2020.
Government passing the pain to households and businesses
- The bulk of the pain of Q2’s slump in GDP had been borne by the government rather than households and businesses. But with the recovery already flattening off, fiscal support fading and the full scale of the fallout in unemployment yet to be felt, that will change in the second half of 2020.
- GDP is estimated to have slumped by 19.8% q/q in Q2 compared to the previous estimate of a 20.4% q/q decline. And there was a tweak to Q1’s outturn (-2.5% q/q relative to -2.2% q/q previously). But none of this changes the big picture that the collapse in activity left the economy 21.8% smaller than in Q4 2019 (although the latest monthly data will probably still reveal a peak to trough fall of 26%).
- The most notable revision to the Q2 breakdown was in business investment, which saw a smaller fall of 26.5% q/q compared to 31.4% q/q previously. This was offset by bigger falls in consumer spending (23.6% q/q compared to 23.1%) and in government consumption (14.6% q/q compared to 14.0%). (See Table 1.) Otherwise, the 22.7% q/q drop in imports outstripped a 11.0% q/q decline in exports, so net trade is still thought to have added 3.5 ppts to GDP growth. And as a result, the current account deficit narrowed from £20.8bn (3.7% of GDP) in Q1 to £2.8bn (0.6% of GDP) in Q2, its smallest since Q2 2011. But with imports recovering more quickly than exports since April, this improvement is likely to prove temporary.
- The good news was that with real household disposable income dropping by “only” 2.3% q/q and nominal consumption falling by 24.2% q/q, the saving rate surged from 9.6% in Q1 to a record-high of 29.1% in Q2. (See Chart 1.) Profits of non-financial businesses sank by 9.6% q/q. These declines in incomes and profits were far smaller than they would have been if the government had not paid the wages of furloughed employees and deferred some scheduled tax payments. But with fiscal support easing and unemployment rising, the government is now handing back the burden to households and businesses.
- Of course, all this backward-looking news is less important than the timelier data which has suggested the rapid rebound phase has already come to an end in September. The renewed COVID-19 restrictions will probably mean that GDP stagnates in Q4, leaving economic activity marooned 5.5% short of its pre-crisis level. And the risk now is that renewed containment measures send the recovery into reverse.
Chart 1: Household Saving Ratio (% of Disposable Income)
Sources: Refinitiv, Capital Economics
Table 1: GDP by Expenditure (Components of GDP, % q/q Unless Stated)
Fix. Capital Formation
Stockbuilding (Cont. to Growth)
GDP (% y/y)
Ruth Gregory, Senior UK Economist, +44 7747 466 451, firstname.lastname@example.org