And finally.... European stock markets have closed sharply lower amid anxiety over the economic damage of Covid-19, and what may be still to come.

All the main indices ended in the red, with the Europe-wide Stoxx 600 dropping 2% to its lowest close in seven sessions.

• FTSE 100: down 90 points or 1.5% at 5904
• German DAX: down 272 points or 2.5% at 10,546
• French CAC: down 127 points or 2.8% at 4,344

In London, cruise operator Carnival (-10.7%) led the fallers, followed by engineering group Melrose (-9%), Intercontinental Hotels (-8.6%) and jet engine maker Rolls-Royce (-7.5%).

They’ll all struggle if the coronavirus pandemic continues to hit economies and curtail the much-desired return to normality.

Risers including pharmaceuticals group Hikma (+3%) and online grocer Ocado (+2%, to a fresh record high).

Among smaller companies, Aston Martin tumbled 15.9% to a new record low after reporting a large loss and a big drop in sales. Shares closed below 32p, having floated at £6 in October 2018.

The news that Britain’s economy had suffered its worst monthly slump on record dampened the mood in the City, especially with so many economists predicting that much more damage ahead.

Wall Street traders are in the doldrums too, after Fed chair Jerome Powell warned that a ‘prolonged recession’ is a threat.

Powell’s reluctance to consider negative interest rates has also hit stocks (the Dow is now down 485 points or 2%). Investors would like to see even more monetary easing, especially given the risk of further Covid-19 infections as economies reopen.

Here’s our news story and analysis on today’s GDP data:

Goodnight. GW

America’s top central banker has warned of the risk of a ‘prolonged recession’, if companies cannot survive the downturn.

Jerome Powell, chair of the Federal Reserve, told the Peterson Institute for International Economics that the coronavirus has left “a devastating human and economic toll in its wake”.

He cited last week’s record-breaking surge in US unemployment.....

The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II. We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased.

Since the pandemic arrived in force just two months ago, more than 20 million people have lost their jobs.

... before warning that the crisis could cause long-term economic damage that won’t simply go away when the pandemic ends, painting a grim picture of a ‘prolonged recession’:

The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy. Avoidable household and business insolvencies can weigh on growth for years to come. Long stretches of unemployment can damage or end workers’ careers as their skills lose value and professional networks dry up, and leave families in greater debt. The loss of thousands of small- and medium-sized businesses across the country would destroy the life’s work and family legacy of many business and community leaders and limit the strength of the recovery when it comes.

These businesses are a principal source of job creation—something we will sorely need as people seek to return to work. A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement. The result could be an extended period of low productivity growth and stagnant incomes.

In conclusion, Powell also warns that while the Fed can lend money to help companies keep afloat, only politicians can agree fiscal measures to help the economy:

Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.

Back in the UK, the NIESR thinktank has predicted Britain’s economy could shrink by nearly a third in the current quarter.

That would far outstrip anything seen in recent decades (the ONS’s quarterly GDP time series goes back to 1955, and shows that Q1 1974 was the worst quarter with a 2.7% drop)

Having analysed today’s GDP report, IERS says:

• The ONS preliminary estimates suggest that growth declined by 2.0 per cent in the first quarter of 2020, broadly consistent with what we suggested it could be last month.
  
• The substantive contraction in growth reflects negative contributions across all the headline sectors.
• Output declined by 5.8 per cent in March itself, mainly due to record falls in construction and services.
• The latest ONS estimates are preliminary and largely uncertain but continues to suggest GDP is around 25 per cent smaller when the lockdown is in place.
• In light of the preliminary release, we forecast growth in the second quarter to decline sharply by about 25 to 30 per cent.

Over in America, the prices charged by companies for their wares has tumbled in another sign that the global economy is weakening fast.

The US Producer Price Index (PPI) fell by 1.3% in April, driven by a 3.3% tumble in prices for goods. That’s the biggest fall sine the index began in 2009.

Core PPI (which strips out food, energy and trade services) fell by 0.9% during April (again, the biggest on record). It was 0.3% lower than a year ago -- the first annual fall in US core PPI inflation ever.

It means companies were forced to slash prices at an unprecedented rate in an attempt to spur demand (partly driven by the slump in energy prices).

The prospect of tax rises and spending cuts to fund the UK’s £300bn Covid-19 bill hasn’t gone down well with some in the City.

Bill Blain, market strategist at Shard Capital argues forcibly that the government should look to grow its way out of the crisis, not inflict more austerity.

Having seen today’s Daily Telegraph, he writes:

The Treasury plan looks a tad premature… We are still in immediate crisis mode. They are also utterly misguided.

The virus is the smoking gun pointed at the heart of the $90 trillion global economy. It’s bad. There is blood and gore everywhere. Just how bad we don’t yet know, but it’s clear of we don’t choose the right policies/treatments to address the deepening economic catastrophe, then we’re doomed.

Blain continues:

The growth reality is simple. Every single corporate on the planet is going to figure out the outlook. If they are watching and listening to governments rein in spending too early and institute austerity spending, then they will predict and prepare for deeper recession. If every corporate is cutting investment plans, reducing headcount, and instituting cost controls – then the economic effect is inevitable; rising unemployment and an ongoing demand shock.

This is the time to be spending our way out the Coronavirus recession.

It doesn’t all have to be negative. Losing our God-given-right to an exotic beach holiday every year spells a massive boost to staycations! (Why did I not buy that cottage in Rock last year!!) It’s going to change, not end, the way we do business. Redirecting the resources currently employed in aerospace towards renewables and new tech will take time – but is possible. Time is the critical ingredient we need to re-order the economy.

If there isn’t a vaccine soon, the border will remain closed and global trade will wither. Protectionism and the growing China/US cold war will deepen. Get used to a new normal economy.

The government would argue that it is trying to limit economic damage through gradually easing its lockdown this week, so that people who can’t work from home return to work.

But even here there is confusion, as Mike Hampson, CEO of Bishopsgate Financial, writes:

We need to get the economy going again but the chaotic nature of the government messaging on how this is going to happen is a real problem. They need to get a grip on a clear message for business, and other sectors as to what they can do and how they can safely restart operations.

This stunning chart from the ONS shows how Britain’s services sector suffered the worst slump on record in March:

Services output fell by 6.2%, the largest monthly fall since records began in January 1997. Several sectors suffered their largest falls on record, including accommodation and food services (down 31%), and transportation and storage (down 13).

Film and TV production declined by 18.5% while personal services (such as hairdressers and dry cleaning) declined by 24.8%.

But the computer programming industry grew by 1.5%.

The ONS says this was:

...driven by large businesses and with responder-led evidence suggesting that “there was a high demand for IT equipment such as desktops and laptops” because of the increase in home working. However, small businesses did experience a fall during March.

Production output slumped by 4.2%, which the ONS says was the worst fall since the Winter of Discontent in 1979 .

But there were bright spots --including 13.0% increase in production of industrial gases, inorganics or fertilisers, which is the third-strongest growth since records began.

This appears to be driven by strong demand for chemicals used in disinfectants and hand sanitisers.

And the paper industry had a record-breaking month, thanks to stockpiling:

Monthly growth for the paper and paper products industry of 11.3% has never been stronger, underpinned by the “panic buying” of products such as toilet roll, kitchen roll and facial tissues.

Eurozone factories also had a torrid March, with widespread shutdown hurting the industry.

New data today shows that industrial production across the euro area slumped by over 11%, a record low - and nearly three times as bad as any single month in the financial crisis.

Production of ‘durable consumer goods’ (ie TV sets, kitchen appliances or cars) slumped by 26% during the month.

Capital goods (heavy-duty machinery and equipment) fell by 15.9% compared with February. But non-durable goods (ie food and drink) only fell by 1.6% - propped up by strong demand as people stocked up.

Keen gardeners have seized the opportunity to return to garden centres as they reopened in England this morning.

Between 30 and 40 customers queued outside Chessington Garden Centre in Surrey before it reopened at 9am this morning.

Shoppers filled the trolleys with bright plants, hanging baskets and compost, with many saying they wanted to bring some colour to their pots and gardens.

Being allowed to reopen is a “relief” for managing director Jolyon Martin, although he says they have already lost 30% of their annual turnover - having been forced to close during almost two months of their peak sales season.

Chancellor Rishi Sunak has also warned that UK is “very likely” entering a deep recession this year.

And once the Covid-19 downturn is over, the UK will have to decide how it pays the bill.

Today’s Daily Telegraph reports that tax rises or a public sector wage freeze are being considered as options that might be needed to help the government cover the cost of the coronavirus crisis.

This raises the dire prospect of another bout of austerity... but Sunak insists it’s ‘premature’ to think about it.

Transport secretary Grant Shapps has also played this down, saying:

In terms of payment, we’ll have to have future budgets, we’ll get to that, but right now we are still in the midst of this thing and we’re clear that we’re not going to go back to world of austerity in order to do that.

Our main UK Covid-19 liveblog has all the details:

It’s worth noting that Britain’s borrowing costs are near record lows at present. The UK can borrow for 30 years at just 0.8% per year -- so there’s plenty of appetite for gilts.

Economists don’t agree on everything. But the universal consensus is that today’s grim UK GDP figures are only a taster for what’s ahead of us.

Stefan Koopman, senior market economist at Rabobank, fears Britain will suffer a U-shaped recover, with a ‘double-digit’ slump in the April-June quarter:

“The UK’s economic engine will be much harder to kickstart than it was to stall, as illustrated by the latest raft of data releases. Talk of a V-shaped recovery feels like wishful thinking and we expect prolonged periods of depressed growth across the majority of the economy. A flatter, U-shaped recovery is more likely.

“Double-digit declines in GDP growth will follow for the second quarter and the full year, but forecasts for beyond that horizon are near-impossible to predict. The risk of a second lockdown should another outbreak occur combined with rock-bottom levels of consumer confidence make for a potent mix of issues for businesses to deal with.”

Hugh Gimber, global market strategist at J.P. Morgan Asset Management, fears the economy won’t recover from the Covid-19 shock until 2022:

“While economic activity should improve from the second half of this year, it still appears that a rebound is likely to be very gradual, and one that leaves GDP levels at the end of 2021 below where they finished 2019.”

Artur Baluszynski, head of research at investment managers Henderson Rowe, points out that other European countries fared even worse as they had tougher lockdowns (as explained earlier).

“The numbers are really bad, especially considering that the lockdown only started mid-March. One of the reasons why the -2% figure is better than expected is because the real impairment of the consumer demand is likely to show up in April numbers.

However, we can now see how the UK’s more relaxed lockdown measures helped the economy to fare better than France or Spain which contracted close to 6% over the same period.

But this doesn’t mean that the UK economy will spring back unharmed, explains Melanie Baker, senior economist at Royal London Asset Management:

“The economic damage from roughly only a week of lockdown is striking. Activity growth in April will be much worse.

“As social distancing is eased, we will probably see a strong initial bounce in activity. However, there isn’t a straightforward trade-off between social distancing and activity.

“Until businesses and households are confident that the virus poses little danger to lives and livelihoods, the recovery is likely to lag and activity levels will struggle to return to pre-crisis norms.”

Here’s our economics editor Larry Elliott on today’s grim UK growth figures:

A record monthly plunge in activity meant the UK economy contracted by 2% in the first quarter of 2020, according to official figures.

Data from the Office for National Statistics revealed the immediate impact of the coronavirus lockdown, producing an unprecedented decline in output in March and the sharpest three-month contraction since the depths of the financial crisis in late 2008.

Although restrictions on businesses and individuals were only introduced in mid-March, the ONS said it was enough to cause a 5.8% plunge in activity in March.

All three main components of growth, services, production and construction, were affected by the fallout from the global pandemic – with factories, shops, restaurants, hotels and building sites all closed on government orders.

Ruth Gregory, UK economist at consultancy Capital Economics, said: “March’s GDP figures showed the UK economy was already in freefall within two weeks of the lockdown going into effect. And with the restrictions in place until mid-May and then only lifted very slightly, April will be far worse.”

Service sector output – which accounts four-fifths of GDP – declined by more than 6% in March, while production fell by 4.2% and construction by 5.9%.

Over the year to the first quarter of this year, the economy grew smaller by 1.6% – its fastest rate of decline since late 2009.

Here’s Larry’s full story:

Aston Martin’s losses ballooned to £119m in the first three months of the year as the coronavirus pandemic caused the already struggling British carmaker’s sales to plunge across the world.

The company sold only 578 cars to dealers in the first quarter of 2020, down 45% from the same period in 2019.

Sales slumped by 86% in China in the quarter, while they were down by 57% and 30% in the Americas and Europe respectively, despite lockdown conditions not starting in earnest until late March.

Lawrence Stroll, Aston Martin’s new billionaire executive chairman after leading a £536m bailout in March, said he was “enthusiastic and confident” about the company, despite “some difficulties” in the short term.

The company is now focusing on reducing the number of cars held by dealers, as well as delivering its new DBX SUV, a car whose success is crucial for Aston Martin’s survival.

Aston Martin was the last of the large UK carmakers to pause production as the pandemic hit in March. It reopened its new St Athan plant in south Wales on 5 May in order to ramp up to full DBX production in “the next few weeks”. Deliveries to customers who have pre-ordered are on track to start in the summer.

However, the first-quarter figures revealed the strain the company was under before it agreed the bailout, with net debt rising to almost £1bn - 16 times higher than a year’s adjusted operating profitability.

Aston Martin will now only build cars to fulfill order demand, and it also suspended its financial guidance for the year.

Over in the City, the FTSE 100 index of blue-chip shares has fallen by 1.3% in early trading, down 78 points to 5916 points.

Other European markets are also in the red, as investors fret about the risk of a second wave of Covid-19 infections as lockdowns are lifted.

Yesterday, a key member of the White House’s coronavirus task force warned that reopening the US economy too soon could lead to ‘really serious’ consequences.

Dr Anthony Fauci warned that ‘little spikes’ in infection could soon turn into fresh outbreaks, forcing lockdown measures to be reimposed.

Fauci told US senators that:

..there is a real risk that you will trigger an outbreak that you might not be able to control, which in fact, paradoxically, will set you back — not only leading to some suffering and death that could be avoided, but could even set you back on the road on trying to get economic recovery

Jing Teow, senior economist at PwC, says the outlook for the UK economy is also ‘highly uncertain’.

The government’s announcement that workers in the manufacturing and construction sector should return to work this week where safe, as well as opening the housing market, could mitigate some of the disruption to business activity in the current quarter.

However, this will depend on the effectiveness of current lockdown measures in preventing a second wave of infections, which may necessitate the reimposition of these measures later on in the year.”

Chancellor Rishi Sunak says he’s not surprised that the UK economy shrank 2% in the last quarter.

Sunak blamed the economic damage caused by the Covid-19 pandemic, adding that his freshly-extended jobs retention scheme should help Britain get through the crisis.

He says (via Sky News):

In common with pretty much every other economy around the world we’re facing severe impact from the coronavirus. You’re seeing that in the numbers.

That’s why we’ve taken the unprecedented action that we have to support people’s jobs, their incomes and livelihoods at this time, and support businesses, so we can get through this period of severe disruption and emerge stronger on the other side.

Many other countries suffered worse downturns than the UK in the last quarter, particularly in Europe.

And there’s a clear link between the tumble in GDP and the severity of the lockdown measures introduced to combat Covid-19.

France, Italy and Spain all moved before the UK, and consequently their economies shrank by more:

• UK: -2%
• US: -1.2%
• Eurozone: -3.8%
• France: -5.8%
• Spain: -5.2%
• Italy: -4.7%
• China: -9.8%

This chart from the ONS plots GDP against a ‘stringency index’ - and there’s a clear correlation (there’s an interactive version here).

This monthly chart of UK growth shows just how dramatically the economy shut down in March, with GDP shrinking by an uprecedented 5.8%.

James Smith, research director at the Resolution Foundation, says there is a lot worst to come:

“The lockdown was only in place for seven working days in the first three months of the year. But it was still enough to bring about the biggest quarterly economic contraction since the peak of the financial crisis and the weakest single-month change on record.

“With the country in full or partial lockdown well into the second half of the year, the grim economic milestones hit in the latest data will be shattered next time around.

“Today’s figures serve as a reminder as to why a bold economic policy response has been needed. That approach will need to continue as Britain begins the long road out of this economic crisis.”

March was a particularly dire month for the economy - with GDP slumping by 5.8%.

It’s the worst performance since the ONS started calculating monthly data back in 1997 - so worst than in any single month during the financial crisis.

Jonathan Athow, deputy national statistician for economic statistics, explains:

“With the arrival of the pandemic nearly every aspect of the economy was hit in March, dragging growth to a record monthly fall.

“Services and construction saw record declines on the month with education, car sales and restaurants all falling substantially.

“Although very few industries saw growth, there were some that did including IT support and the manufacture of pharmaceuticals, soaps and cleaning products.

“The pandemic also hit trade globally, with UK imports and exports falling over the last couple of months, including a notable drop in imports from China.”

Here are the key points from today’s UK GDP growth report, showing how the economy shank in January-March:

• UK gross domestic product (GDP) in volume terms was estimated to have fallen by 2.0% in Quarter 1 (Jan to Mar) 2020, the largest fall since Quarter 4 (Oct to Dec) 2008.
• When compared with the same quarter a year ago, UK GDP decreased by 1.6% in Quarter 1 2020; the biggest fall since Quarter 4 2009, when it also fell by 1.6%.
• This release captures the first direct effects of the coronavirus (COVID-19) pandemic, and the government measures taken to reduce transmission of the virus.
• There has been a widespread disruption to economic activity, as services output fell by a record 1.9% in Quarter 1; there were also significant contractions in production and construction.
• Household consumption fell by 1.7% in Quarter 1 2020, the largest contraction since Quarter 4 2008, alongside declines in gross fixed capital formation, government consumption and trade volumes.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

We start with some breaking news - the UK economy has suffered its worst contraction since the depths of the financial crisis, as the Covid-19 slump begins.

Britain’s Gross Domestic Product shrank by 2.0% in the first three months of 2020, new figures released by the Office for National Statistics show.

That’s the biggest quarterly drop in activity since the fourth quarter of 2008 - after the collapse of Lehman Brothers triggered the financial crisis.

In March alone, GDP contracted by 5.8% as the lockdown began, with shops and factory shutting their doors. All sectors of the economy were badly hit. The service sector shrank by 6.2% during March, while manufacturing output fell by 4.6% during the month and construction shrank by 5.9%.

Yesterday, chancellor Rishi Sunak warned that the UK recession was “already happening”, as he extended the jobs retention scheme until October. This data shows he was absolutely right.

And there is worst to come. Last week the Bank of England suggested that the UK economy might contract by 25% in the April-June quarter, creating the deepest recession in three centuries.

More details and reaction to follow.

The agenda

• 7am BST: UK GDP report for Q1 2020, and for March
• 10am BST: Eurozone industrial production data
• 2pm BST: Federal Reserve chair Jerome Powell speaks at the Peterson Institute for International Economics