UK economy takes 25% hit from Covid, recovery seen slow

Britain's economy shrank by a quarter over March and April as entire sectors were shuttered by the coronavirus lockdown in what looks likely to be the bottom of a "catastrophic" crash before a long and slow recovery.

Dwarfing previous downturns, the economy contracted by 20.4% in April from March, when it shrank by nearly 6%. It was 24.5% smaller than in April 2019.

Both of April's readings represented bigger falls than the dire forecasts in a Reuters poll of economists.

The Office for National Statistics said the economy had shrunk back to its size in 2002.

"This is catastrophic, literally on a scale never seen before in history," Paul Johnson, director of the Institute for Fiscal Studies think tank, said. "The real issue is what happens next."

Prime Minister Boris Johnson said the figures were no surprise as Britain's huge services sector was being hit particularly hard by social distancing measures, but he said a recovery would follow.

"Coronavirus is likely to hit a country like the UK economically very hard. We depend on services, on human contact," he said. "But we're also a very resilient and a dynamic economy and we will bounce back."

Much of Britain's retail sector is due to open its doors next week and the government last month urged people who could not do their jobs at home to return to work.

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Bank of England Governor Andrew Bailey - who has warned of the deepest recession in three centuries - said there had been signs of recovery since April's "dramatic" fall but the big question was how much long-term economic damage would be done.

"We hope that will be as small as possible but we have to be ready and ready to take action, not just the Bank of England but more broadly, on what we can do to offset those longer term damaging effects," he said.

The BoE is expected to announce a fresh increase of at least 100 billion pounds ($126 billion) in its bond-buying firepower next week.

Finance minister Rishi Sunak is considering what further stimulus measures he needs to provide.

The Organisation for Economic Co-operation and Development said this week that Britain could suffer the worst downturn among the countries it covers, with an 11.5% slump this year.

IFS director Johnson told Sky News the hit might be short, if the roughly one third of private sector employees who are temporarily laid off can return to work, consumers go out and spend again and Britain avoids a second Covid-19 wave.

But he said it was more likely that unemployment would jump when the government's wage subsidy scheme ended in October, and that Britain would limp into 2021 with the risk of a Brexit shock also on the horizon.

Britain left the European Union at the end of January and began a no-change transition period which lasts for the rest of 2020. Talks on a broad new deal have made little progress.

The ONS said output in the dominant services sector fell by 19% in April from March while manufacturing was down more than 24% and construction crashed by 40%.

In the three months to April, the overall economy contracted by 10.4% from the previous three-month period.