Thread by @thatchamdad

The UK economy shrank 2% in the first 3 months of 2020. And if you think that’s not bad (it really is), bear in mind things only really started to slow down from mid-Feb and this includes just 1 week of lockdown. Now imagine what Q2 will look like ... 😕 theguardian.com/business/live/…

It’s hard to appreciate how catastrophic these numbers are, so let me try to add some context.

Caveat: While I have a decent understanding of macroeconomics, I’m not a professional economist. I’ll leave that to the other Twitter experts who know everything about everything 😉

Firstly, what does the 2% actually mean? It means that the UK’s economic output is estimated to be 2% lower between Jan and Mar than it was in the previous 3-month period (Oct-Dec 2019) - this is called ‘quarter-on-quarter’ or QoQ

Now 2% may not sound like much - but it is. The average QoQ figure is usually more like +0.5%, so this is quite a dramatic shift

And it’s not as simple as just saying “Ah, but Q4 2019 includes Xmas, so it’s just because of that”. GDP numbers factor in seasonality. Q1 growth is usually positive when you look back at previous non-recessionary years. So anyone who claims this is spouting fake news

Now bear in mind the QoQ number of -2% is just the tip of the iceberg. The first half of the quarter was pretty normal. The economy only started to slow from about mid-February as people started to realise something serious was coming. And Q1 only includes ONE week of lockdown

It’s more illuminating when you look at the data for March alone. The month-on-month (MoM) comparison for Mar vs Feb shows a fall of 5.8%. This is the single biggest monthly decline on record - an indication of how catastrophic the month truly was

A couple of side notes here regarding MoM figures:

1. The number of days in each month makes no difference - this is accounted for in the calculations

2. As MoM covers a shorter period, it’s more volatile. In in normal times you see the odd negative number, but never this big!

April is likely to be even worse, as this will cover a whole month of lockdown with shops & factories closed, reduced Easter holiday spending and travel, reduced work for self-employed/furloughed etc. Don’t be surprised if the MoM is closer to -10% for Apr

The good news is that, after April, the MoM figure should start to level out as Apr then becomes the baseline for comparison. Indeed, as we come out of lockdown, MoM will start to increase

The government will no doubt spin that as an economic recovery. Not true. The economy will be on the road to recovery, not recovered. It’s like falling off the top of a tall building and then claiming that taking the stairs to the first floor is a return to where you started 🤔

What will accelerate the economy? Consumer confidence. Around 70% of the economy is ‘services’ - this includes retail, leisure & entertainment, financial service etc. Anything that isn’t manufacturing, agriculture, mining or oil production, essentially

Even once these parts of the economy are reopened, it’s going to take a while for consumer confidence to recover. We will be in a world where many people won’t want to immediately start shopping. Or will be cautious because of job uncertainty. And pubs etc won’t reopen at once

If people think the economy will snap straight back to normal, they are sadly deluded. It *will* recover - but it will be a long process

Add the fact that eventually someone will have to pay for all the emergency economic stimulus such as the furlough scheme. The government didn’t just dip into its pocket to get the cash. It borrowed from the future to safeguard the present. So guess who ends up paying for it all?

Yep, that’s right. You and me. We will most likely see a new period of austerity lasting several years. Public spending cuts. Possibly quantitative easing (which tends to drive inflation, another problem). Certainly taxation increases of some sort

Theresa May was right about one thing: there is no magic money tree. Actions today have consequences tomorrow. There’s no such thing as a free lunch etc etc

So where does that leave us going forward? Recession looks certain, although officially we won’t be in one until the Q2 data in 3 months’ time, as the definition of ‘recession’ requires two consecutive quarters of ‘negative growth’. But to you and me, it feels like recession NOW

Today’s QoQ figure of -2% will be dwarfed by Q2’s because, at best, we will only have just started to emerge from lockdown by the end of June. My guess (and it’s just a guess) is -5%

Eventually, the MoM figures will level and start to climb (after hitting rock bottom). This will then be followed by a similar, lagging improvement in QoQ. But when we look back on 2020 as an entire year, don’t be surprised if we see a double-digit contraction in GDP

It’s an overused word, but that kind of devastation - quite literally, a decimation of their economy - will be unprecedented in our lifetimes. We’re talking Great Depression levels of catastrophe here

The UK economy is worth over £2 trillion annually - so a 10% drop is £200bn+. Not to mention any additional Brexit impacts. *That* is the size of the bill we will have to pay eventually

Apologies for bombarding you with so much detail this morning but I think it’s important to try to understand what this all means in simple language before all the analysis and ill-informed counter-analysis takes over. Hope someone finds this helpful! ~END~

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