In the second quarter of 2020 the UK economy suffered its biggest slump on record as the Coronavirus pandemic and lockdown measures saw the economy shrink 20.4% from Q1 according to the figures from the Office for National Statistics.
This figure represented the biggest quarterly decline on record.
It is also one of the worst amongst the economies of the western world, around twice the size of the declines seen in the quarter in Germany and the US. However, Spain saw a decline of 22.7% in the same period.
The ONS said the economic slump was due to a collapse in output driven by the closure of shops, hotels, restaurants, schools, and other service sector businesses. The UK services sector accounts to around four-fifths of the economy.
Household spending, factory and construction output also all fell.
However the figures for June saw the first hints at economic recovery with the economic decline concentrated in April at the height of lockdown measures from the pandemic. On a month-by-month basis, the economy grew by 8.7% in June.
Nigel Green, founder and chief executive of Financial Planning group deVere, said that a growing number of UK and global investors are likely to move their assets overseas due to increasing nervousness surrounding the state of the UK economy.
Mr Green said: “Whilst the economy grew 8.7% in June, which beat economic estimates, and confirms a recovery is now underway, the real test will be after the summer when there are no more national lockdown-easing measures to lift the economic spirits, more local restrictions are likely to be imposed and as significant programmes such as the furlough scheme which has protected jobs come to a halt.
“All of this creates ever more uncertainty in the UK economy.”
“UK and global investors will be becoming increasingly nervous of this worrying situation and can be expected to take precautionary measures to insulate themselves against a potential fall in the value of UK-based financial assets. A growing number inevitably and quite sensibly are likely to be looking to grow and safeguard their wealth by moving assets overseas through various established international financial solutions. The pace of this trend, I believe, will increase over the next few months as the issues intensify.”
Mr Green also said he believes the weak economy also further boosts the chances of tax hikes and relief cuts in the UK November Budget.
He said: “It is highly likely taxes will rise and reliefs be cut. Possible targets for hikes could include income tax for higher earners, capital gains tax, inheritance tax, and VAT. In addition, new wealth taxes may be brought in, which was something the Prime Minister was considering before the pandemic hit."
Quilter Investors were more positive around opportunities for investors in the UK.
Hinesh Patel, portfolio manager at Quilter Investors said: “Today’s GDP figures confirm the UK is in recession, one that will likely take a considerable amount of time and effort to get over. This is not a normal recession after all. However, the long, slow road to recovery is underway, just not at the speed we were all hoping for during the initial national lockdown.
“Economic output remains at a fraction of what it was in February, and as such it is clear further stimulus is going to be required. The UK relies so heavily on the services sector and consumer consumption. With the government potentially coming to the maximum limits of reopening that is possible and favouring localised lockdowns in the future to prevent further economic reckonings, they need to get people consuming as much as they can. However, the fact of the matter is that many industries still going to struggle through the recovery.
“While the overall picture is shocking, the Bank of England has left itself room to act from a monetary perspective. This shifts eyes onto Rishi Sunak to see if his innovations can be successful. The Eat Out to Help Out scheme appears to have gotten off to a good start, and it is this more targeted stimuli that other industries will be craving. The UK public loves a deal, so this scheme may provide a template for future targeted stimulus. The house builders in particular will be watching it closely, particularly given the proposed relaxation in planning laws.
“With Brexit negotiations seemingly going nowhere, and as a result businesses fighting for survival on two fronts, business investments and growth in the UK is likely to remain subdued for some time yet. Opportunities do exist for investors, though, and with a harshly competitive environment we expect to see those quality and innovative companies prosper. Throw in further stimulus come the Autumn and these companies may be the ones to benefit greatly.”
Laura Suter, personal finance analyst at investment platform AJ Bell, pointed out that any rebound in the economy is dependent on the UK avoiding a second wave of the pandemic as well as positive trade negotiations around Brexit.
She said: "A second wave of the virus will hamper any rebound, as will the effect of some of the localised shutdowns we’ve seen in recent weeks. The much-talked-about V-shaped recovery of the UK economy relies on no second lockdown and also on UK trade talks being successful – presenting two large uncertainties."