Graeme Wearden 

Hopes for V-shaped recovery fade as UK economy grows 1.8% in May – as it happened

Britain’s economy has shrunk by a quarter since the pandemic began...and its fiscal watchdog fears the recovery will be slow and painful
  
  

London’s financial district back in May
London’s financial district back in May Photograph: Tony French/Alamy Stock Photo

Closing summary

Time for a quick recap.

Hopes that the UK economy could achieve a rapid rebound from the Covid-19 recession have taken a knock. The latest GDP data shows that the economy only expanded by 1.8% in May, much weaker than the 5.5% growth expected.

The data also show that the UK economy shrank by over 19% in March-May, and has contracted by a quarter since the pandemic began.

A procession of economists have warned that the V-shaped recovery looks increasingly illusive. Chancellor Rishi Sunak said it shows the ‘scale of the challenge’.

Britain’s fiscal watchdog added to the gloom, predicting the worst annual growth in 300 years, and a slow rebound. The OBR’s central scenario now shows the UK won’t return to its pre-crisis levels until the end of 2022, with the national debt heading over 100% of GDP.

The Covid-10 crisis continues to buffet the UK economy, with the boss of JD Sports claiming that compulsory mask wearing will hurt the retail sector:

Airline Virgin Atlantic hammered out a £1.2bn rescue deal, avoiding a state bailout:

Eurozone industrial production picked up strongly in May, jumping 12% month-on-month, offering some hope that the recovery could strengthen.

But Singapore slumped into recession after shrinking at an annualised rate of 41% in April-June.

Goodnight. GW

European stock markets have closed for the day - and the weaker pound has helped the FTSE 100 to outperform continental rivals.

The blue-chip index has closed slightly higher, up three points at 6179, lifted by oil companies BT and Shell.

Sterling is now down 0.6% against the euro, which makes multinationals earnings in Europe more valuable.

BT was the top riser, up 4%, after the government gave telcos until 2027 to remove Huawei kit from their 5G infrastructure - and resisted ordering to rip out equipment from older networks.

Germany’s DAX lost 0.8%, while France’s CAC finished 1% lower.

David Madden of CMC Markets sums up the European session:

The mood has been downbeat all day as continued health concerns and rising tensions in relation to China has weighed on stocks. Dealers are still worried about the rate at which the virus is spreading, and seeing as some restrictions are being reintroduced, that is adding to the bearish move too.

The US government has hit out against the Beijing administration in regards to its territorial claims in the South China Sea. This represents the latest development in the frosty relationship between the two largest economies in the world. China isn’t on great terms with the UK either, as earlier today it was announced the British government basically banned Huawei from its 5G network.

Wall Street looks a little brighter though - the Dow is up 1%, lifted by construction equipment maker Caterpillar, and oil companies Exxon and Chevron.

Speaking of taxes.... The Telegraph has spotted that Chancellor Rishi Sunak has commissioned a review of capital gains tax (paid when you sell an asset).

The move could be a sign that the historically low CGT rates could be increased, to cover some of the debt increase caused by the pandemic. Here’s the story.

Tom Selby, senior analyst at AJ Bell, suspects Sunak is considering aligning CGT rates with income tax- which might not please his own party.

“With UK borrowing set to hit its highest level in peacetime history, Chancellor Rishi Sunak’s request for a review of CGT feels like the starting pistol for a tax grab ahead of the Autumn Budget later this year.

“A quick look at the numbers gives us some idea of why CGT might be in the Treasury’s crosshairs. While chargeable gains subject to CGT after losses but before the annual exempt amount were £57.9 billion in 2017/18, total CGT liabilities were £8.8 billion – implying an average tax rate of just 15%.

“Given those who pay CGT are twice as likely to pay higher-rate (40%) income tax as taxpayers generally, the Treasury may have its sights set on aligning CGT rates and income tax rates. CGT rates are currently set at 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayer (18% and 28% where gains relate to residential property).

“Such a shift could both simplify the system and raise tax revenue – particularly if the annual exempt amount, currently set at £12,300, is either slashed or abolished altogether.

“Any attempt to attack CGT would inevitably face stiff resistance from Conservative backbenchers. However, with the Treasury needing to raise funds to pay for its COVID-19 response and a huge Parliamentary majority, the Government may feel CGT cuts are among its least-worst options.”

The Financial Times’s Chris Giles has written about the OBR’s warning that the UK public finances are on an ‘unsustainable path’ (as flagged at 12.15pm):

He says:

Tax increases of £60bn or a return to austerity will be needed to restore the UK’s public finances to stability after coronavirus, the fiscal watchdog said on Tuesday, predicting government borrowing will reach £370bn this year.

Describing the long-term public finances as “clearly . . . on an unsustainable path”, the Office for Budget Responsibility said that a combination of borrowing to address the consequences of Covid-19 and the government’s decision to limit immigration after Brexit would increase the necessity for tax increases.

In its central scenario, it calculated that the country now needed to raise 50 per cent more from tax increases each decade to keep public debt stable as a share of national income than would have been required before the pandemic, assuming the prime minister keeps his promise of not imposing austerity measures. There was now a need for £60bn of tax rises per decade to stabilise the public finances, it said.

More here: Tax rises of £60bn needed to stabilise finances, says watchdog

But other economists aren’t convinced by the OBR’s logic. Jo Michell, associate professor in economics at Bristol Business School, reckons the watchdog’s forecasts for the national debt are flaky.

He points out that the OBR forecasts assume long-term borrowing costs of 4.1% per year. Currently, UK 30-year government bonds are trading at a yield (interest rate) of just 0.6% - a historic low (recently falling below Japan) which shows strong appetite for such gilts.

Plus, the Bank of England could expand its quantitative easing programme and buy more government debt. That would keep borrowing costs low, as well as reassuring private investors that gilts are a safe investment*.

In May, Professor Michell recently created a neat online tool with the IPPR that lets you examine how the Covid-19 crisis would affect the public finances. It shows, he says, that high borrowing and an increased debt level are manageable in the medium term.

He co-wrote at the time:

A more equitable way to place the public finances on a sustainable footing is through progressive taxation, including taxation of wealth.

Given that government spending as a share of GDP will need to rise, higher tax shares should be a medium-term policy goal.

More here.

[* Note: the UK can’t run out of money, as it prints its own currency. So, it can create the pounds needed to tackle unemployment and boost growth, and use various tools including taxation to tackle inflation].

Updated

NIESR: UK economy faces permanent damage

Back to today’s GDP figures... the NIESR economic thinktank has estimated that the UK economy contract by up to 25% in the second quarter of 2020.

Having analysed May’s growth report, it predicts a massive slump in Q2, and a more modest recovery in Q3, saying:

  • The UK economy remains on course to decline by 20 to 25 per cent in the second quarter of 2020.
  • According to the ONS estimate published this morning, the UK economy contracted by 19.1 per cent in the three months to May, broadly in line with what we forecast last month. The contraction in growth reflects widespread negative contributions across all major sectors.
  • The economy grew by 1.8 per cent in May itself but output remained 25 per cent below its February level.
  • The initial outlook for the third quarter of 2020 is for growth of about 8 to 10 per cent.

Senior economist Dr Kemar Whyte is also “doubtful” that we’ll see a V-shaped recovery.

The loosening of Covid-19 restrictions has provided an impetus to kickstart the UK economy. However, the measures unveiled by the Chancellor at the Summer Statement are a poorly timed change of tack and could trigger a sharp rise in unemployment, and possibly lead to permanent long-term damage to the economy.”

Virgin Atlantic secures £1.2bn rescue

Newsflash: Virgin Atlantic has announced it has secured a rescue deal to recapitalise the airline.

The ‘private-only solvent recapitalisation’ will pump £1.2bn into Virgin Atlantic, which has been extremely badly hurt by the Covid-19 pandemic and the slump in airline travel.

The funds come from existing shareholders, including £200m from Richard Branson’s Virgin Group. US hedge fund Davidson Kempner Capital Management is also involved, providing £170m of debt funding.

However, the UK government is not involved.

Here’s the details:

  • Shareholders are providing c.£600m in support over the life of The Plan including a £200m investment from Virgin Group, and the deferral of c.£400m of shareholder deferrals and waivers
  • New partner Davidson Kempner Capital Management LP is providing £170m of secured financing
  • Creditors will support the airline with over £450m of deferrals
  • The airline continues to have the support of credit card acquirers (Merchant Service Providers) Lloyd’s Cardnet and First Data.

Virgin Atlantic CEO Shai Weiss says the deal will let the airline keep flying (passenger flights will resume on 20 July).

“Few could have predicted the scale of the Covid-19 crisis we have witnessed and undoubtedly, the last six months have been the toughest we have faced in our 36-year history. We have taken painful measures, but we have accomplished what many thought impossible.

The solvent recapitalisation of Virgin Atlantic will ensure that we can continue to provide vital connectivity and competition to consumers and businesses in Britain and beyond.

We greatly appreciate the support of our shareholders, creditors and new private investors and together, we will ensure that Virgin Atlantic can emerge a sustainably profitable airline, with a healthy balance sheet.

US weekly earnings slide

Just in: Average pay in the US has dropped, as America’s economy is buffered by the Covid-19 pandemic.

Hourly earnings of private workers shrank by 1.2% in June compared to May, the latest inflation report shows. That may be a sign that some lower-paid employees, who suffered badly from job losses in the lockdown, have returned to work, pulling the average lower.

The Labor Department also reports that inflation rose to 0.6% in June, from just 0.1% in May. Add in a 0.6% drop in average hours worked, and it all means that real earnings shrank by 2.3% in June. Not an encouraging sign for the US economy.

The pick-up in inflation was partly due to higher fuel costs, following the rise in the oil price. But food is also pricier -- up 4.5% over the last 12 months, with the index for food at home rising 5.6%.

Two Wall Street banks have also revealed the impact of Covid-19 on their businesses.

JP Morgan has reported that profits shrank by 51% in the last three months - a sharp fall, but less severe than expected. The bank has also put aside some $10.5bn to cover a likely jump in bad loans, as the global recession hits its customers.

JP Morgan CEO Jamie Dimon sounded a cautious note:

“Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy.”

Rival Citigroup was hit harder, reporting that profits slid 73% in Q2. It has put $5.6bn aside to cover loan defaults.

Economic confidence in Germany has taken a small knock this month.

The ZEW institute’s gauge of German economic sentiment has dipped to 59.3, down from 63.4 in June - and weaker than expected.

It’s the first drop in four months, suggesting renewed caution about the economic situation. Investors are slightly more upbeat about current conditions, though.

Britain’s weak recovery in May hasn’t improved the mood in the markets today.

All the main European indices are in the red, with the Europe-wide Stoxx 600 down 1.2%.

Investors are still disconcerted by the late fall on Wall Street last night, and worrying that new lockdown measures in the US will hamper the recovery.

Ironically, the drop in the pound today is supporting the FTSE 100 (it makes overseas earnings more valuable). The blue-chip index is only down 0.25%, helped by multinationals like Royal Dutch Shell, Imperial Brands and WPP.

But the UK-focused FTSE 250 is worse hit, down 1.6%. Aerospace engineer Meggitt, retail group Frasers and outsourcing group Capita have all lost over 5%.

The broad message from the OBR is clear -- Covid-19 has knocked Britain even further away from fiscal sustainability.

Unless governments take action - cutting spending, or raising taxes, or getting growth motoring - the national debt is on track to spiral steadily higher:

The OBR points out that the UK fiscal position has weakened since 2018, as “successive prime ministers and chancellors” have lifted public spending – particularly on health care and capital projects - paid for with higher borrowing.

But judging when to tighten, and how, is tough:

This and future governments will face a huge challenge in judging when and how public spending and tax policy levers should be pulled to place the public finances on a sustainable path.

The economic picture is slightly brighter in the eurozone.

Industrial production across the euro area jumped by 12.4% in May, compared with April, new figures show. That shows that factories did succeed in growing their output, after the shutdown in March and April.

That’s stronger than the UK - today’s GDP figures show British production output rose by 6.0% between April 2020 and May 2020.

However, it still leaves eurozone factory output nearly 21% lower than a year ago.

Economist Julian Jessop reckons this is an encouraging sign for the UK - as eurozone factories reopened a little earlier.

The OBR was created a decade ago, to help guide the UK out of the shock of the 2008 financial crisis.

In today’s fiscal sustainability report, the watchdog points out that Covid-19 is an even bigger blow. And that may mean governments need to rethink their tax and spending strategies:

From a fiscal risks perspective, the salient fact is that the economy has now been subject to two ‘once-in-a-lifetime’ shocks in just over a decade.

The budget deficit peaked at around 10 per cent of GDP after the financial crisis and may well top 15 per cent this year, whereas no previous post-war recession had even pushed it as high as 7 per cent of GDP.

This may just be bad luck, but it could also indicate that economies today are more prone to very large shocks than we have previously assumed. All else equal, if the inevitable periodic damage done to the public finances by such shocks has become larger or more frequent, then policymakers may need to aim for lower levels of borrowing and debt to run a prudent fiscal policy during normal times.

The CBI, which represents British businesses, is urging the government to resist tax rises or spending cuts to address the cost of the crisis.

Rain Newton-Smith, CBI Chief Economist, says the economy is too weak, given it faces the worst recession in 300 years.

“This latest OBR analysis reflects the scale of the economic harm caused by this pandemic. We’re not out of the woods yet - firms continue to struggle with cash flow and weak consumer demand. The Chancellor’s Summer Statement took important action to flatten the curve of unemployment but more may be needed.

“Economic recovery is the key to balancing the public finances over the longer term and the Autumn Budget is likely to be too early to make significant inroads through tax rises and public spending cuts. It will take several years for the UK economy to recover to pre-crisis levels and ensuring a jobs rich recovery must be the number one priority by supporting business to thrive.”

Here’s Torsten Bell of Resolution Foundation on the OBR forecasts:

Ranko Berich, Head of Market Analysis at Monex Europe, says the OBR’s three new economic scenarios are reminder that no-one knows just how well, or badly, the crisis will play out:

“Sterling is trading lower this morning after May’s GDP miss, which does challenge recent optimism from the Bank of England about the initial recovery from April’s lows. However, while the initial speed of recovery is important for the UK economy and for sterling, the real issue is the pace of growth over the coming years, which we know very little about right now.

“The stark differences between the OBR’s upside and central scenarios highlights just how crucial assumptions about the level of economic “scarring” is to any forecast for the economy - and how much uncertainty surrounds any economic forecast. Assuming no scarring to the labour market and consumer behavior, and a rapid re-opening of the economy, the OBR envisages GDP recovering its pre-pandemic peak as early as 2021. This is roughly in line with the Bank of England’s last “illustrative scenario”. With moderate scarring, the OBR’s central scenario does not see GDP recovering fully until 2022, more similar to the IMF’s expectations for lasting damage. The bottom line is that nobody truly knows where we will be between these scenarios.”

Duncan Weldon of The Economist reckons we’re looking at a square root-shaped recovery.

The downside scenario look like a Nike swoosh.

Ed Conway of Sky News reckons the V-shaped recovery is toast:

Maybe the V stands for Very unlikely.....

The UK is facing a serious unemployment crisis if the economy doesn’t recover fast from the Covid-10 shock.

Under the Office for Budget Responsibility’s new central scenario, the jobless rate peaks at nearly 12% at the end of this year - up from below 4% at the start of 2020. That would match the worst levels seen in the 1980s recession (see chart below).

And although the OBR sees unemployment falling in 2021, it is still above pre-crisis levels in 2025, showing a slow recovery.

Their downside scenario is much worse - with unemployment hitting a truly grim 13.2% in early 2021.

Anneliese Dodds MP, Labour’s Shadow Chancellor, says the OBR analysis is “very worrying”, and shows the need for targeted help to prevent companies laying off staff.

Unless the Government takes urgent action, the UK’s unemployment crisis is going to get much worse.

The Chancellor must now listen to calls from Labour, business and trade unions and make the Job Retention Scheme live up to its name. Instead of withdrawing support across the piece, he must target it to sectors where it’s needed most.

If he doesn’t act, even more people run the risk of being thrown into the misery of unemployment and our economy will continue to suffer.”

National debt to smash through 100% of GDP

The Covid-19 crisis is likely to drive Britain’s national debt over 100% of GDP, for the first time since the 1960s, the OBR’s new fiscal analysis show.

That’s because the public finances has suffered a double blow -- tax takings will be £133bn lower due to the weak economy, while spending will jump by £135bn due to efforts to cushion the impact of the pandemic.

The OBR says:

Higher cash borrowing and a smaller economy push public sector net debt (PSND) above 100 per cent of GDP for the first time since the early 1960s in all years of the [central] scenario.

Here’s the details of how tax bills will shrink:

  • Income tax and NICs are £43.5 billion lower in 2020-21, due mostly to lower employment and earnings. Medium-term economic scarring leaves receipts £27.6 billion lower than our March forecast in 2024-25.
  • VAT is £32.4 billion lower in 2020-21, thanks largely to lower consumer spending, with purchases of items taxed at the standard rate hit harder than spending in aggregate. VAT receipts remain £14.1 billion below our March forecast in 2024-25.
  • Corporation tax receipts are £20.3 billion lower in 2020-21, thanks to much weaker profits, plus much higher losses that can be used to offset past and future liabilities. Receipts remain £6.0 billion below our March forecast in 2024-25.
  • Fuel duty receipts are £4.7 billion lower in 2020-21, reflecting the lockdown, with some persistence across the scenario due to the weaker path for economic activity.
  • Air passenger duty is hit particularly hard due to the collapse in air travel. In 2020-21, receipts fall by nearly two-thirds and are £2.7 billion below our March forecast.
  • Other significant shortfalls are seen in business rates (mostly due to the business rates holidays for some sectors), capital gains tax and stamp duty land tax.

Updated

OBR: Economy might not recover until 2024

The Office for Budget Responsibility doesn’t believe a V-shaped recovery is very likely either.

Its new central scenario is that the UK economy won’t return to its pre-crisis levels until the end of 2022. In other words, it would take more than two years to recover the output lost in March and April.

But the OBR also says the pace of the recovery is ‘highly uncertain’.

It depends on several factors: the amount of scarring suffered by the economy, such as unemployment; whether (and when) effective vaccines and other treatments to crush Covid-19 are developed; how fast the lockdown is lifted; and whether government action to protect the economy works.

So, the OBR has drawn up three scenarios. The optimistic one does show rapid recovery, but the pessimistic one looks more like an L than a V.

  • In the upside scenario, activity rebounds relatively quickly, recovering its pre-virus peak by the first quarter of 2021, and there is no enduring economic scarring.
  • In the central scenario, output recovers more slowly, regaining its pre-virus peak by the end of 2022. Cumulative business investment is 6 per cent lower than in the March forecast over five years, while unemployment and business failures remain elevated. Real GDP is 3 per cent lower in the first quarter of 2025 than in our March forecast.
  • In the downside scenario, output recovers even more slowly, returning to its pre-virus peak only in the third quarter of 2024. This results in a more significant loss of business investment, more firm failures and persistently high unemployment as the economy undergoes significant restructuring. Real GDP is 6 per cent lower in the first quarter of 2025 than in our March forecast.

Updated

OBR: UK facing worst slump in 300 years

Newsflash: The UK economy is on track for its worst year in three centuries, and its biggest ever budget deficit in peacetime.

That’s according to the Office for Budget Responsibility, Britain’s independent fiscal watchdog.

In a new report, the OBR outlines three scenarios for the future -- and all three show the worst recession in 300 years, and a massive spike in borrowing.

The OBR says:

The coronavirus outbreak and the public health measures taken to contain it have delivered one of the largest ever shocks to the UK economy and public finances. Our three medium-term scenarios (upside, central and downside) see the largest decline in annual GDP for 300 years this year, accompanied by an unprecedented peacetime rise in the budget deficit to between 13 and 21 per cent of GDP, and debt rising above 100 per cent of GDP in all but the upside scenario.

The pandemic has worsened the baseline against which existing long-term pressures on fiscal sustainability will be felt, and has materially altered our assessment of future fiscal risks.

In its ‘central scenario’, the OBR predicts public sector net borrowing will hit £322bn or 16 per cent of GDP, in the current financial year -- the highest peacetime level in at least 300 years.

That, though, doesn’t include the £30bn of measures announced by Rishi Sunak last week.

More to follow....

Updated

One of the messages from today GDP report is that Britain’s recovery is uneven - with manufacturing growing 8%, but services barely expanding at all.

Economics journalist Paul Mason says this shows the need for ‘targeted’ support, to help struggling companies keep workers on.

The pound has lost ground against the US dollar and the euro this morning.

Sterling is down almost half a cent against the dollar at $1.251, and a third of a eurocent at €1.1037, as traders digest the news that Britain’s economy grew by less than hoped in May.

The pound was already suffering from a move into safe-haven currencies after that late wobble on Wall Street last night, and has kept moving down.

“Sterling extended a selloff after the GDP numbers disappointed,” says Neil Wilson of Markets.com, adding:

The UK is already seeing what a non-V recovery looks like.

GDP growth rebounded 1.8% in May, which was well short of the 5.5% expected. In the three months to May, the economy contracted by 19.1%. Some of the numbers are truly horrendous and it’s hard to see how the economy can deliver the +20% rebound required to get back to 2019 with confidence sapped like it is and unemployment set to rise sharply

Melanie Baker, senior economist at Royal London Asset Management says the UK government should be very wary of withdrawing its stimulus measures:

“This morning’s data shows that the economy needs ongoing policy support; support measures already in place should be withdrawn only very cautiously.

“The early stage recovery in the UK was weaker than expected, but this is unlikely to be the final word on what happened to the economy in May, with the ONS citing more uncertainty than usual around the GDP estimates.”

Updated

Hopes for V-shaped recovery fade

Hopes that the UK economy could achieve a rapid, or V-shaped, recovery from the crisis have taken a knock today.

While 1.8% growth in May isn’t exactly unwelcome, it’s mediocre following the 20.3% cratering Britain suffered in April.

Ian Stewart, chief economist at Deloitte, says it will take ‘years, not months’ to fix the damage:

“The bounce-back from COVID-19 has got off to a disappointing start. The pace of activity will have picked up sharply in June as the easing of the lockdown got underway. The chances of a quick return to normal, of the famed V-shaped recovery, are falling.

“It is likely to take years, not months, to repair the damage to the economy done by COVID-19.”

Tom Stevenson, investment director at Fidelity International, warns that growth may not accelerate if people are unwilling to return to the shops, or are quite happy to keep working from home:

He says:

Hopes of a V-shaped recovery are fading fast, and I suspect we’re looking at something resembling far more of a ‘W’ - a series of improvements and relapses, before a proper recovery takes hold.

“Pent-up demand amongst consumers suggests that we may see some spikes in activity as shops and restaurants re-open, flights resume, and workers continue their gradual return to the office. However, this upwards trajectory may be flatter and the recovery take longer than we hoped. It is one thing opening up, another persuading consumers to return to their old ways.

“Of course, many are hoping that initial signs of recovery may buoy confidence, and that we see a positive feedback between higher spending and lower unemployment. The thinking here is that early demand as the economy re-opens will persuade employers to retain staff in anticipation that their services will be needed - if not immediately, then very soon. The scale of support measures offered by the Government so far has been vast. The question now is whether it is enough to support long-term recovery, or whether it has simply prolonged the agony.”

The NIESR thinktank also fear the economy will struggle in the coming months.

Jonathan Gillham, chief economist at PwC, reckons the economy “plateaued” in May, but still extremely weak - with the economy roughly a quarter smaller than in February.

The economy is still at incredibly low levels of production - it’s just less bad than the reductions we saw in April.....

“The message from May’s data appears to be that the economy is currently operating at a very low level of output, but some sectors are starting to increase output from what was observed in April. Looking ahead we would expect this trend to continue, but the big question will be - how rapidly can the economy bounce back?”

Economist Rupert Seggins has also broken down today’s GDP report by sector, to create this neat chart:

Rob Kent-Smith, head of national accounts at the Office for National Statistics, has highlighted the key points in today’s GDP report:

Just to clarify one point from earlier -- it was the retail sector (including car sales) which posted the best growth across the service sector in May.

That’s partly because the government allowed DIY stores and garden centres to reopen in May.

The ONS says:

In May 2020, the services sector grew by 0.9%, following a fall of 18.9% in April 2020.

The largest positive contributor to this increase was the wholesale, retail and repair of motor vehicles sub-sector, in particular the retail industry which grew 12.0% as a result of strong growth in non-food stores and a record proportion of online sales

Full story: UK economy recovery slower than hoped

Here’s my colleague Richard Partington on today’s GDP report:

The British economy returned to growth more slowly than expected in May following the sharpest plunge on record a month earlier, triggered by the coronavirus pandemic.

The Office for National Statistics said gross domestic product (GDP) grew by 1.8% in May as the economy staged a modest recovery from April, when GDP crashed by a fifth during the first full month of lockdown.

After the biggest collapse in activity since records began, economists had expected some recovery in activity in May. However, the bounce back was weaker than a 5.5% growth rate forecast by City economists.

With thousands of companies forced to close temporarily to limit the spread of the virus, Britain’s dominant services sector – which makes up about 80% of the economy – grew by just 0.9% on the month, dragged down by falling levels of activity in arts, entertainment and recreation, as well as at estate agents and IT firms.

Manufacturing and construction grew by more than 8% from the level of economic output in April, as activity at factories and on building sites began to recover with physical distancing measures in place.

More here:

The UK isn’t officially in recession yet, although frankly it’s only a matter of time.

Next month’s GDP report, for June, will surely show that the economy contracted extremely sharply in the second quarter of 2020 (having shrunk by a fifth in April alone). We already know UK GDP shrank by around 2.2% in Q1 - the worst in 40 years.

Singapore, though, has beaten us to it. It tumbled into recession this morning after posting its worst growth figures on record. Its economy shrank at an annualised pace of 41.2% in Q2 -- or around 10% quarter-on-quarter, due to its own Covid-19 lockdown.

More charts!

Today’s GDP report is packed with charts showing how the economy cratered in March and April, before returning dizzily to modest growth in May.

This one shows how construction took the worst hit, with most building sites shutting down completely.

The next chart shows how the service sector has endured an awful time in March and April, and a minor recovery in May.

As you can see, the retail sector and the car industry suffered the worst slump - and the best improvement.

But sectors such as transport, finance and education barely grew in May (the tiny red bars show a measly recovery).

The arts, professional science, and real estate all kept shrinking in May. The lockdown prevented theatres from putting on plays, scientists from getting to the lab, or estate agents from showing people around homes.

As mentioned earlier, the manufacturing sector did better with 8.4% growth in May.

Production of rubber, plastic and various machinery picked up strongly, but electricals and chemicals was weaker -- and transport barely improved after a shocking time.

You can read it yourself here.

Updated

Robert Alster, head of investment services at wealth manager Close Brothers Asset Management, says the modest recovery in May is a disappointment:

For the economy to only grow by 1.8 percent in May, the month where lockdown started to ease, points to choppy waters ahead. The Government will be hoping that we’ve already reached economic ‘rock bottom’ and that these latest figures are the start of a consistent, upward rebound.

“While GDP has improved slightly, it’s worth noting that the economy is still 25% smaller than it was in February, before the pandemic took hold. Jobs, both on the high street and in industry, are disappearing at an alarming rate and there are no signs yet of any real improvement in the UK labour market.

Rishi Sunak: GDP figures show scale of challenge

Here’s the chancellor of the Exchequer, Rishi Sunak, on today’s GDP figures:

“Today’s figures underline the scale of the challenge we face. I know people are worried about the security of their jobs and incomes.

“That’s why I set out our Plan for Jobs last week, following the PM’s new deal for Britain, to protect, support and create jobs as we safely reopen our economy.”

“Our clear plan invests up to £30bn in significant and targeted support to put people’s livelihoods at the centre of our national renewal as we emerge through the other side of this crisis.”

James Smith, Research Director of the Resolution Foundation, says the recovery from the Covid-19 slump has begun.

But its strength will depend on two factors -- how people behave, and if a Covid-19 vaccine is successfully developed.

“Today’s data tells us that the UK economy started to recover as lockdown restrictions were eased in May. But what would normally be seen as strong growth in May of 1.8 per cent mainly reflects the depth of the lockdown’s economic damage, rather than a swift or V-shaped recovery. The economy was still just three-quarters of the size it was as recently as February.

“While we should expect strong immediate bounce backs in many sectors, such as retail which grew by 12 per cent in May, what recovery we actually see from here will depend on how people respond to the easing of restrictions and, crucially, the course of the public health crisis. Ultimately, the UK economy is unlikely to return to close to its pre-covid economic path until a vaccine or treatment is found.”

Economists: No V-shaped recovery here!

City economists are disappointed that the UK didn’t grow faster in May.

Economist Rupert Seggins points out that the economy has still lost over 17 years of growth:

Jeremy Thomson-Cook, Chief Economist at Equals PLC, says it will take many months before ‘normality’ returns:

May’s run of GDP, industrial production and services sector activity confirms that it’s easier to fall down a lift shaft than walk up a flight of stairs and the ongoing economic recovery will need many more months before any vague sense of normality is restored.

There are few signs that the UK economy is close to anything resembling a v-shaped recovery although we expect that June’s data will be better than May’s which have shown little more than a false dawn.”

Keith Church of 4most Europe agrees:

Simon French of Panmure Gordon fears the economy has suffered ‘prolonged’ damage.

Services and industry shrank in last quarter

Over the last quarter, the services sector fell by 18.9% while production shrank by 15.5%, the ONS says.

That includes a 37.8% slump in education output due to school closures, and a 31.4% drop in health output following “reduced activity in elective operations and fewer accident and emergency visits”

Food and beverage service activities shrank by 69.3%, while the motor trade contracted by 71% (because car sales tumbled).

Manufacturing output fell 18.0% in March-May, with the manufacture of transport equipment slumping by 45.7% as many factories remained closed.

Updated

UK GDP: The key chart

Britain’s manufacturers drove growth in May, boosting their output by 8.4% as factories emerged from the lockdown.

The construction sector grew by 8.2% -- having contracted by a whopping 40% in April.

But services companies disappointed - with growth of just 0.9% in May. That will worry the government, as the services sector is roughly three-quarters of the whole economy,

This chart has all the details - including that the UK economy has contracted by 24.5% since February. Truly astonishing.

Although the UK economy is growing again, it’s only taken the first small step towards repairing the damage of the last quarter - as this chart shows:

Introduction: UK economy grew 1.8% in May

Good morning. Britain’s economy has returned to growth for the first time since the Covid-19 pandemic forced the country to lock down.

But it’s still a quarter smaller than before the crisis began.
UK GDP rose by 1.8% in May, according to data just released by the latest estimate from the Office for National Statistics. That follows the record slump of 20.3% in April, and a 6.9% decline in March.

This suggests the gradual reopening of some UK businesses in mid-May helped the economy off the mat, as some factories resumed operations and construction workers picked up tools.

But this is rather weaker than hoped - City economists had forecast a 5.5% jump in growth for May.

And the scale of the economic damage in the last quarter is still immense.

Today’s data shows that the UK economy shrank by 19.1% in the March-May quarter. That’s horrendous loss of activity that is already leading to job losses and store closures.

Jonathan Athow, Deputy National Statistician for Economic Statistics, says:

“Manufacturing and house building showed signs of recovery as some businesses saw staff return to work. Despite this, the economy was still a quarter smaller in May than in February, before the full effects of the pandemic struck.

In the important services sector, we saw some pickup in retail, which saw record online sales. However, with lockdown restrictions remaining in place, many other services remained in the doldrums, with a number of areas seeing further declines.”

More details and reaction to follow....

Also coming up today


Although today’s UK GDP figures are the main event in the City, we also get the latest US inflation data and a new reading of economic confidence in Germany.

European stock markets are expected to fall this morning, after a late selloff on Wall Street last night.

US traders were spooked by the news that California is ordering restaurants, bars, movie theaters and malls to close again, following a surge in new coronavirus cases.

Tech giants took a biffing before the closing bell. Tesla, which had soared 16% (!) in early trading to a record valuation of $321bn, ended down 3%.

The agenda

  • 7am BST: UK GDP report for May
  • 10am BST: ZEW’s German economic sentiment index for July
  • 1.30pm BST: US inflation data for June
  • 2pm: NIESR publishes its monthly UK GDP Tracker for April-June

Updated

 

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