UK economic outlook
11th August, 2020
There is no doubt the Covid-19 pandemic has imposed a severe hit on the UK economy. The monthly data from the Office for National Statistics (ONS) on UK Gross Domestic Product (GDP) now suggests activity fell by an enormous 24% between February and April. This has been broadly based across the economy with construction (-44%), manufacturing (-28%) and services (-24%) all seeing sharp declines. In some sectors of the economy, such as hotels and restaurants, activity effectively ceased in April and May as business restrictions were imposed.
So, if anything the UK data on economic activity have been at lower end of expectations. In May, the Bank of England forecast that UK GDP would contract by 14% in 2020, with the unemployment rate rising to 8%, followed by a relatively fast rebound in 2021, with a 15% expansion. In June, the Bank of England announced a further £100bn of quantitative easing, in addition to the £200bn it had already announced in March. Projections from other institutions also paint a gloomy picture of an especially sharp contraction in 2020 with partial rebound in 2021. The International Monetary Fund’s (IMF's) June World Economic Projections were for UK GDP to contract by 10.2% this year, up 4% next year. The current consensus average of private forecasters is for a 8% contraction in 2020.
Labour market impact
So far, the damage to the UK labour market still isn’t clear. The official jobs data show employment at 33 million in April, still up 0.7% on the year, and unemployment rate at 3.9% unchanged from previous months.
However, this probably merely reflects the fact the labour force survey has struggled to capture the sudden impact of Covid-19. The timelier claimant count rose to 2.8 million in May, up almost 1.6 million in just two months. Also, the close to 10 million workers and self-employed paid via the UK government’s Coronavirus Job Retention Scheme (CJRS) and Self-Employment Income support scheme.
Chancellor of the Exchequer Rishi Sunak now faces a difficult balancing act to taper back the CJRS as the economy reopens and business activity returns. He has said the scheme, which pays up to 80% of wages of furloughed staff up to a maximum of £2,500 per month will begin to phase out from August. However, there is a clear risk of a fresh wave of unemployment if the scheme is tapered back too quickly.
Rebound in activity
Still there is strong evidence that the rebound in activity is happening. Retail sales in May clawed back almost half of the decline in March and April. Similarly, June’s Purchasing Managers Index (PMI) surveys showed a stark improvement back towards the 50 level; composite (47.6), manufacturing (50.1), services (47.0). The additional of restrictions on June 15th and reopening of the hospitality sector on July 4th show there is clearly further to go.
However, social distancing restrictions and cautious companies and households could mean that it takes some time yet before activity returns to normal. This heightens the pressure on Rishi Sunak ahead of his summer economic statement on June 13th, amid speculation he will announce a temporary cut in Value Added Tax (VAT) and ramping-up of public infrastructure spending. At the same time it's worth remembering the enormous cost of Covid-19. Public sector borrowing was an eye-watering £55bn in May, after the £44bn borrowed in April, implying the government has already built up a deficit worth almost 5% of GDP in just the first two months of the budget year. May’s public finance data also showed public sector net debt reached £1950bn, rising above 100% of GDP for the first time since 1963.
Some commentators have suggested the UK deficit could exceed 15% of GDP in budget year 2020/21, making Rishi Sunak all the more reliant on the Bank of England’s quantitative easing programme to keep borrowing costs down.
Warning: Forecasts are not a reliable indicator of future performance.