UK economic outlook October 2020
12th November, 2020
Undoubtedly, the UK economy has been particularly badly hurt by the Covid-19 disruption. UK GDP contracted by a staggering 20% in Q2 2020, including an enormous 23% hit to consumer spending and a 25% fall in investment. Output was especially hard hit in the construction (-35%) and retail/hospitality (-33%) sectors. The message is that because the UK economy is especially reliant on household spending – the damage has been particularly severe compared to other countries.
Further drags on GDP
Thankfully, monthly GDP data shows that the trough in economic activity was in April, followed by a steady, albeit incomplete recovery in the following months. In July the level of GDP was 12% below its pre-Covid level. Purchasing Manager Indices (PMI), amongst other indicators, suggest the rebound continued into August and although PMI declined in September, there was not as much of a decline as forecast.
However, the threat of a second outbreak of Covid-19 and tighter business restrictions has come to the fore and is the key risk facing the UK economy. The new restrictions announced on September 22nd, the 10pm curfew, delayed reopening of some hospitality activities, and working from home guidance will hit the economy in October – delaying the recovery.
Housing beats expectations
Defying expectations has been the UK housing market, with house price inflation accelerating to 5% on a range of measures, driven by a surge in demand for larger homes. However, crucially, the stamp duty holiday that will end in March 2021. Notably, the Royal Institution of Chartered Surveyors (RICS) survey shows UK estate agents remain downbeat on 12-month prospects for the housing market – indicating that they expect the froth will subside next year.
The same predicament faces Chancellor of the Exchequer, Rishi Sunak, who must content with an enormous fiscal deficit of £400billion (close to 20% of GDP), but has delayed the budget to put off tax rises and austerity measures that had aroused opposition within his own Conservative Party.
However, he has pressed on with plans to drop the jobs furlough scheme, currently supporting 9.6 million workers, which could threaten a sharp rise in unemployment in the coming months. Eventually, the UK will need a credible deficit reduction plan.
Brexit is another risk for the UK. Despite proceeding with the ‘internal market bill’ that, by its own admission, will break international law. The UK government has seemed relatively upbeat on the prospects for the Brexit negotiations. However, London and Brussels seem to have different views on the state of the negotiations, the former suggesting only fishing rights and state aid concerns remain as an outstanding issue. European diplomats are concerned that Boris Johnson will have to make greater concessions to secure a deal. All now seems set for a denouement at the next European Council meeting on October 15th-16th.