Britain's economy slumped 20.4% in April but it is how it recovers that is key, say analysts

Figures for the British economy in April were shocking, but not unexpected given it was effectively shut down for the whole month. UK GDP dropped by 20.4% with a 25% fall between February and April. Assessing the slowdown, Hargreaves Lansdown’s head of investment analysis, Emma Wall, said the economy had had a “short, sharp shock”, but the more important consideration was what shape the recovery would take for the UK economy. “A so-called ‘V-shaped’ recovery is a period in which the economy experiences a sharp dip followed by a sharp upward rise, as the shape of the letter suggests. An ‘L-shaped’ recovery is a sharp dip but a slower and steadier increase upwards over time, like the shape of an `L’ slightly tilted. Ultimately, what happens after the furlough scheme has ended will impact which shape the recovery will take”, Wall said. The analyst added that the UK should keep an eye on countries that are further along in the pandemic cycle, particularly in Asia, which if they saw successful lifting of lockdown measures could “boost stock market sentiment and provide hope for the domestic economic outlook”. Russ Mould, AJ Bell investment director, added: “Investors are not stupid, they know April was arguably the height of the lockdown. “The unprecedented nature of the fall in economic activity just mirrored the unprecedented act of effectively shutting down a modern economy.” However, Edison Group investment strategist Alastair George warned that the central banks “have almost been too effective in supporting markets, masking the economic cost of lockdowns as well as dimming employment and training prospects for younger people less at risk from [coronavirus]”. “These will be important figures to frame the debate on the government’s lockdown policy for the remainder of the year”, he said. Second wave and Brexit key risks Looking forward, analysts at Berenberg said that for all advanced economies the “key risk to the outlook remains a potential second wave of the virus that requires nationwide lockdowns to contain it”. Learning to live with the virus will remain a major challenge until better medicine becomes available”, Berenberg said, adding that the UK faced an additional risk from its ongoing negotiations with the EU about their post-Brexit trading relationship. “Negotiators seem to be stuck at an impasse and are far apart on key issues such as governance, level-playing-field rules, fishing and, critically, the Northern Irish border. On top of the huge economic and reputational damage from the badly handled pandemic, the tail-risk of disorderly exit from the single market presents an additional threat to the UK”, they said.