UK GDP drops most since the GFC

Chris Scicluna
Emily Nicol

Overview:
Following yesterday’s retreat on Wall Street on words of caution from Dr Fauci and various Fed speakers (the S&P500 eventually closed down a little more than 2.0%), European markets have opened notably lower, with most markets down more than 1.0%. That followed a mixed showing in Asia – Japan’s TOPIX closed down just 0.1% despite record weakness in the latest Economy Watchers survey and a jump in bank lending, while markets in China and Hong Kong edged higher.

In bond markets, USTs are firmer (10Y yields down a further couple of bps to 0.66%) with fed funds futures still flirting with negative territory for next year. Core euro area bonds are up too. And after the latest UK GDP data confirmed the weakest quarter since the global financial crisis in Q1, even though restrictions on freedom of movement only kicked in from 23 March, Gilts are firmer too (yields are down 2-3bps across the curve, with 2Y yields having fallen to a record low below -0.04%).

Looking ahead, the main event will likely be Fed Chair Powell’s appearance on a Peterson Institute webinar, while ECB Chief Economist Lane will also be speaking publicly online.

UK:
The UK economy contracted sharply in Q1, at the fastest rate since the global financial crisis in Q108, as the coronavirus, social distancing and – eventually – restrictions on freedom of movement hit economic activity hard in March. In particular, GDP fell 2.0%Q/Q, leaving it down 1.6%Y/Y, the biggest annual decline since Q109.

The limited data published on the expenditure breakdown showed that household consumption fell 1.7%Q/Q, also the steepest drop since Q408. Fixed investment fell 1.0%Q/Q, although business capex was flat. And government spending dropped 2.6%Q/Q. Export volumes fell a whopping 10.8%Q/Q, while imports fell a little less than half that pace. So, following a rare trade surplus in Q4, the balance in Q1 swung back firmly into a deficit of 0.9% of GDP.

In terms of the sectoral breakdown, the contraction was similarly broad-based. Services output fell 1.9%Q/Q, the biggest quarterly fall on the series. Production fell by 2.1%Q/Q, with manufacturing output down 1.7%Q/Q led by auto production (down 16.3%Q/Q). Pharmaceuticals were one of the sole sources of growth, up 9.2%Q/Q, with output of chemicals also firmer. And construction output fell 2.6%Q/Q. Given difficulties collecting data, however, the ONS noted that its estimates should be treated with a larger degree of caution than usual.

Of course, the steep contraction over Q1 as a whole reflected the marked drop in activity in March, when GDP is estimated to have contracted a record 5.8%M/M as the UK went into lockdown on the 23rd of the month. Services activity shrank a record 6.2%M/M, with manufacturing down 4.6%M/M and construction down 5.9%M/M.

We are bound to see far sharper declines (of marked double-digit percentages) in April as the lockdown continued across the whole month. Indeed, the BRC’s retail sales monitor suggested that total sales fell a record 19.1%Y/Y last month. And the Barclaycard measure of consumer spending across the full range of goods and services fell 36.5%Y/Y despite a rise of more than 14%Y/Y in expenditure in supermarkets. With a very gradual easing of restrictions starting only today, and most shops still shut and social distancing to be maintained, the rebound in May will be shallow too. So, GDP in Q2 will also post a very steep double-digit percentage decline, likely marking the sharpest and deepest drop in UK economic activity for more than a century.

Japan:
Yesterday’s release of the Cabinet Office’s composite business conditions indices confirmed a marked deterioration in both the coincident and leading indices in March to the lowest readings since 2011 and the global financial crisis respectively. And today’s Economy Watchers survey for April suggested that the deterioration in economic activity intensified last month.

Indeed, coinciding with Abe’s eventual declaration of an initial state of emergency in Tokyo, Osaka and certain other prefectures on the 7th of that month, and its extension to the rest of the country on the 16th, the headline economy watchers’ current conditions balance fell a further 6.3pts on the month to 7.9, the lowest reading on record by a considerable margin. And the weakness was broad-based, with the household and corporate-related demand DIs similarly both slumping to record lows. Moreover, economy watchers expected the economic situation to become even more severe over the near term due to the coronavirus. Indeed, the outlook DI fell a further 2pts in April, with a more marked deterioration in the corporate-related demand outlook DI.

Against this backdrop, the latest Japanese bank lending figures showed a notable acceleration in April, with growth up 0.9ppt to 3.1%Y/Y, the fastest since August 2017. Loans from city banks were up 3.4%Y/Y, the most since the start of 2009, with the monthly rise of 2.5%M/M a series high. While Japanese firms were on average sitting on larger precautionary cash piles than those in other major economies, these rates of increase in lending broadly tally with those recorded in the euro area in March. In particular, lending to NFCs in the euro area that month was up 2.5%M/M and 5.4%Y/Y; when including households, the total stock of lending was up 1%M/M and 3.5%Y/Y.

Euro area:
For the euro area, today will bring aggregate industrial production figures for March. Following the release of the data from several member states – including hefty drops in Germany and France and a record near-30%M/M decline in Italy – we currently expect output across the region as a whole to have declined 14%M/M in March, leaving it more than 9% lower over the first quarter as a whole. Elsewhere, ECB Chief Economist Lane will participate in two online conferences on Wednesday. Supply-wise, Germany will sell longer-dated bonds, while Italy will also sell bonds on Wednesday.

US:
In the US, following yesterday’s weak consumer inflation release, which showed core prices posting the largest monthly drop on record, today’s producer price inflation data are likely to flag further disinflationary prices pressures down the pipeline. But likely of more interest today will be Fed Chair Powell’s appearance on a webinar organised by the Peterson Institute discussing current economic issues.

Australia:
Yesterday’s NAB business sentiment survey offered a sobering assessment of conditions in April – business conditions were judged to have deteriorated further to their worst on record while a bounce back in the confidence index still left it well below its previous trough during the 1990s recession. But today’s Westpac consumer sentiment release suggested some light at the end of the tunnel consistent with the moves to relax restrictions set out in the government’s three-stage plan announced on 8 May. In particular, the headline confidence indicator jumped 16.4% in May to 88.1, almost reversing the record drop seen in April, as those sectors hit hardest bit the social distancing rules posted substantial gains (by more than 30%M/M). Nevertheless, the overall sentiment index still marked the second-lowest reading since the global financial crisis and remained firmly in ‘pessimistic’ territory.

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