Tracking the UK’s economic recovery through the lens of six indicators
On September 17, 2020 by Thomas BelaynehThe UK economy suffered one of its worst economic declines on record in the second quarter, as the government announced a countrywide lockdown on 23rd March 2020 that shuttered businesses and schools across the country.
A few days before lockdown began, the Bank of England convened an emergency meeting where the committee unanimously voted to cut interest rates to an all-time low of 0.1% and increase its government and investment-grade corporate bond purchases by £200bn. The Chancellor, Rishi Sunak, followed up by announcing the UK government would pay 80% of the wages of millions of furloughed workers.
Since March, extensions to both the Bank of England’s and UK Treasury’s support programmes were announced and the economy has recovered substantially from April lows although GDP is still some way off its pre-lockdown levels. As the furlough scheme is set to end on 31st October, now seems like an ideal time to assess how far we’ve come and whether more stimulus is necessary.
Monthly GDP
In July, GDP grew for the third consecutive month, however, only half of the output loss caused by Covid-19 has been recovered. Although July’s GDP is 18.6% higher than April’s GDP, it’s still 11.7% below February’s level.
Driven by a surge in private new housing (up 30.3%), construction was the fastest growing segment, up 17.6%, although it remained 11.6% below February’s level. In services, as expected, accommodation and food service activities soared higher by 140.8%, however, it remained a staggering 60.1% below it’s February level.
UK PMIs
Following the lowest level ever recorded in the Services PMI in April, the index only just returned to growth (a score over 50) in the last two months and, at 58.8, the Services PMI recorded its fastest rate of growth since April 2015 in August.
There were three key drivers: pent-up demand in the housing market, increased spending associated with the government’s ‘Eat Out to Help Out’ scheme and a recovery in demand for business services.
Concerningly, 34% of respondents reported job cuts driven by review of staffing needs and the winding down of the UK government’s furlough scheme.
Turning to the Manufacturing PMI, at 55.2, it recorded its highest level in 30 months in August. Production rose at its fastest pace since May 2015 and was supported by the fastest growth in new orders since November 2017.
The bulk of the increase in new orders came from the domestic market, however, new export orders grew at its fastest rate in ten months. The positive news didn’t spill over into jobs, however, with respondents reporting job cuts for the seventh month in a row.
UK CPIH inflation (YoY)
CPIH inflation has been trending lower, as expected, declining from 1.5% in March to 0.9% in April, then making somewhat of a recovery before lurching lower to 0.5% in August.
The largest positive contributions to the CPIH inflation rate in August were recreation and culture (0.35%), housing and households services (0.2%) and alcohol and tobacco (0.06%).
The two largest negative contributions to the CPIH inflation rate in August were restaurants and cafes (-0.27%) and transport (-0.1%) where falling prices were the result of the government’s “Eat Out to Help Out” scheme and falling air fares, respectively.
GFK’s Consumer Confidence
GFK’s consumer confidence index started the year off poorly with Brexit worries pervasive among survey responses before Covid-19 compounded this and pushed the index to a multi-year low of -34. Since then, the index has only recovered a third of its fall from March’s level and it doesn’t seem like to will reach there anytime soon.
In August, consumers were marginally less optimistic on both current and future economic conditions, although they became marginally more optimistic on their finances and ability to make major purchases over the next twelve months. Regardless, the index remained at the same level as it did in July.
Retail Sales
Remote working has increased demand for home goods, namely food, computers and computer-related accessories, furniture, and televisions, as well as driving a surge in online sales. According to ONS data, online retail sales grew 50.4% from February to July whilst the proportion of money spent online increased from 20% to 28.9%.
The flip side of this, however, has been low footfall in areas where shops mainly cater to office workers. Retail businesses are struggling in areas such as the City of London. Clothing, the worst hit retail sales segment from coronavirus, saw sales volumes rise 11.9% in July, although it remained 25.7% below February’s level.
Halifax House Price Index
Whilst house prices increased 1.7% month-on-month in August, they were 5.2% higher compared to a year earlier. There were three main drivers behind the recent strong activity: pent-up demand, a desire to move into larger homes and the temporary cut to stamp duty. Halifax expects “greater downward pressure on prices in the medium term” with weaker earnings growth and a higher unemployment rate being key factors behind their prediction.
Conclusion
To wrap up, GDP, the PMIs, retail sales and house prices have all rebounded strongly off April lows, although GDP remains approximately 12% below February’s level and the pace of its rebound has cooled off lately. Moreover, consumer confidence remains rooted at historically low levels and, with no signs that the government will extend the furlough scheme, this is likely to fall lower in the coming weeks.
Inflation will likely pick up as the government’s “Eat Out to Help Out” scheme has ended (although one should note that some chains continue to offer discounted prices) but I don’t think this will cause significant inflationary pressure.
Covid-19 cases are on the rise, with 3991 new cases reported yesterday, and when coupled with the job losses on the horizon, the government must act to support the momentum of the economic recovery and extend the furlough scheme. Current projections by the Bank of England puts the unemployment rate at 7.5% by year-end.
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