UK Economy's Road to Recovery Grows Longer after GDP Downgrade 

- Q1 GDP revised to -2.2%, as current account deficit swells.
- Household spending revised lower and savings rate rises. 
- Economy headed for historic Q2 fall, long road to recovery.

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Britain's road to recovery may have grown longer on Tuesday and the bill for the damage done by the coronavirus larger after the Office for National Statistics (ONS) revised its estimate of first-quarter GDP lower. 

Household spending fell by -2.9% in the opening quarter of the year, the ONS said Tuesday, which was a downgrade from the earlier estimate of a -1.2% fall that pushed up the households savings rate from 6.6% in the final quarter of 2019 to 8.6% in the first three months of the year. 

When combined with losses of output from the services, production and construction sectors, the reduction in spending was enough to drive a -2.2% fall in GDP for the opening quarter, a larger decline than the -2% initiallly reported. 

"The 2.2% q/q drop in GDP in Q1 2020 was the joint largest fall since 1979 and sets the stage for an unprecedented fall in Q2," says Thomas Pugh at Capital Economics. "The surveys suggest that output recovered more quickly than we had previously expected in May and June and that the risks to our Q2 GDP forecast of a 23.0% fall are firmly weighted to the upside. But it will still take the economy until 2022 before it regains its pre-crisis level."

The Office for National Statistics also revised its estimate of full-year 2019 growth on Tuesday, lifting it by 0.01% to 1.5%, although the upgrade offers little consolation to an economy that came to a literal standstill late in the first quartrer as the coronavirus established a foothold in the country. 

First quarter losses were largely the result of a -5.8% fall in output that took place in March after the economy was subjected to nine days of 'lockdown,' although the ONS has since said that GDP fell by -20.4% in April and that output was down by an annualised -10.4% in the three months to the end of April. 

"In theory, households’ spending could rebound to exceed incomes for a short while, if consumers deplete the extra savings accumulated during the lockdown. But with consumers’ confidence likely to remain depressed by regular localised outbreaks of Covid-19 and rising unemployment, we expect households’ saving rate to settle well above pre-Covid levels, capping out the recovery," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 

'Lockdown' has radically reduced UK economic output while social distancing measures like the one metre and two metre rules are set to constrain the economy in its recovery, even if the government doesn't exacerbate the damage by withdrawing its support for companies and households too early. 

HM Treasury is attempting to wind down its furlough scheme and says it will effectively sit on its hands while assessing what further support is necessary, while the BoE has cut the pace of its bond purchases by half. Meanwhile, the Bank of England (BoE) has halved the pace of its government bond buying.

Recovery is widely seen as having began in May when IHS Markit PMI surveys suggested a rebound in activity in the UK's main economic sectors although there's uncertainty over whether this really is the case due in part to the way the indices are calculated as well as that restrictions on movement were not materially eased until June. 

Separately, the ONS also said Tuesday the UK's current account deficit rose from -£9.2 billion in the final quarter of 2019 to -£21.1 bn, taking it to an annualised 3.8% of GDP in the first three months of the year. This was owing largely to trading in precious metals however, with the adjusted deficit having narrowed by -£1.3 bn to -£19.9bn or 3.6% of GDP.

"The large current account deficit will require the U.K. to continue to attract a steady stream of external finance. This leaves the pound vulnearable to deteriorations in global investors’ willingness to take risks and extend credit. Sterling almost certainly would depreciate sharply again if a major second wave of Covid-19 emerges or if the U.K. and E.U. fail to either sign a trade deal or to extend the transition period before the end of this year," Tombs says.