UK recovers 70% of lost output: what next?
A full recovery will take longer and the UK government should avoid a total withdrawal of the furlough scheme.
The UK economy continued to rebound at a brisk pace following the sharp fall in activity caused by lockdowns in response to the Covid-19 pandemic.
Real GDP grew by 6.6% in the month of July compared to 8.7% in June. To put these figures into context, economic activity fell by 25.5% between February and April this year. Since then, GDP has risen by 18.6%, meaning that it remains 11.6% below the level in February, or the start of the crisis. Even if the economy stalls in August and September, growth for the third quarter will comfortably be in double digit territory.
Within the sector breakdown of the economy, construction saw the largest gain over the month (+17.6%), while manufacturing and services made solid gains (+6.3% and 6.1%). Within services, wholesale & retail services activity has surpassed its pre-Covid-19 peak with an impressive rebound, but apart from public admin & defence (which never fell), all other sectors have much further to go.
The biggest laggard is the accommodation & food services sub-sector, which had activity running 60% below pre-Covid-19 levels. The government’s VAT cut and “eat out to help out” scheme should help boost these figures for August, but these figures highlight the desperate state of the hospitality sector.
Looking ahead, we expect the pace of growth to moderate in coming months as social distancing restrictions and general cautiousness limit activity. The recent rise in the number of new cases could lead to further local lockdowns, and we cannot rule out the risk of a general national lockdown later in the year. This remains our most negative and prominent risk scenario.
Moreover, the government continues to plan for a gradual withdrawal of the Coronavirus Job Retention Scheme (or furlough scheme). A full withdrawal would be a mistake, as it will sever important ties between employees and employers, raising the unemployment rate more than necessary and potentially slowing the economic recovery.
In the absence of any furlough scheme, local lockdowns may not be achievable, raising the risk of the virus spreading, and eventually a national lockdown being re-introduced.
A more sensible approach would be to have a targeted, less generous scheme that also allows reduced hours to be worked. Companies must also contribute to the cost to avoid labour-hoarding.
Just over 70% of the fall in GDP has been recovered in just three months. However, the rest of the recovery will take time, especially the final 10% as certain sectors will find that their business models are no longer viable. The government must be on hand to support the transitions required.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.