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17 August 2020: Last of the low-hanging fruit

The latest brief from the bank’s chief economist.

Last updated: 18 Aug 2020 5 min read

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Two things are becoming increasingly clear. The low-hanging fruits of the recovery may have been plucked; things look set to get harder from here. Meanwhile policy support needs to remain in abundance to help the recovery along.

Escape velocity

News last week that the UK economy is officially in recession for the first time in 11 years came as no surprise. But the scale of the decline was still shocking. A record 20.4% quarter-on-quarter contraction in Q2, over and above a 2.2% contraction in Q1, has left UK’s GDP four times weaker than during the global financial crisis. Accommodation and food services plunged by 86.7%! That said, a record decline looks to be followed by a record rate of expansion. A recovery has been under way since May, with economic growth accelerating to 8.7% month on month in June.

Opening salvo

Here’s a lesser-known fact. The same number of people lost their jobs in the recessions of the early 1990s and the 1980s (employment fell by 1.6m in both cases). Yet whereas one is carved in the collective memory, the other barely registers. Events burn deeper when they embody wider structural change. Hence the current desperation to minimise job losses and avoid long-term worklessness. Coronavirus claimed 750,000 paid jobs from March to June, roughly the fall in employment in 2009. Yet 7.5 million people were temporarily away from work in June. And many may not return.

One step forward, 2.5% back

Fretting about the UK’s dire productivity track record during the white heat of a pandemic may seem a fool’s errand. Certainly, it’s hard to measure output per hour worked accurately when both economic activity and hours worked are plunging, as they were in Q2. Still, the omens bode ill: labour productivity dropped by a record 2.5% between March and June, meaning we produced less per hour than on the eve of the financial crisis. Falls were widespread, though much worse in hardest-hit sectors like hotels and catering (-75%) and manufacture of transport equipment (-34%).

Restarting

The UK’s trade surplus (yes, that’s surplus, not deficit) widened to £8.6bn in June, as imports took a bigger hit than exports. Trade in goods was more affected than the trade in services, with the major impact seen in machinery and transport equipment, and fuel due to the knock-on effects of the virus-caused lockdown on demand for vehicles and oils. However, on a monthly basis, things were better in June than May, with imports and exports increasing by 21.9% and 16.8% respectively. The rise chimes well with the results of the Business Impact of COVID-19 Survey (BICS), which show a reduced impact on trade for surveyed businesses.

What’s next? 

This is the question on everybody’s mind. Fast indicators and surveys indicate continued recovery. According to the BICS, of the businesses that responded, 94% reported currently trading. At the end of April only 75% reported trading. However, 29% of currently trading businesses reported that operating costs were equal to or higher than turnover. In businesses that had not permanently stopped trading, 14% of the workforce had been furloughed. In the last two weeks 6% of workers had returned from furlough and 4% had returned to the normal workplace.

Rebound

Eurozone industrial production made up a lot of lost ground in June, growing by 9% as firms started the recovery from lockdown. There’s still a long way to go, output has another 12% left to grow to match last year’s level, but it is an encouraging start. Growth was strongest in the durable consumer goods component, reflecting the fact that retail sales have rebounded incredibly strongly to be above last year’s level in June. Slowest to respond are capital goods, as many firms’ investment plans have been interrupted by the pandemic. Across countries, Spain and Portugal are the farthest from normal, while Ireland and Norway are the only countries to be producing more now than a year ago.

Mixed bag

Better than expected retail sales and stronger labour market data have painted an upbeat image for the US economy in Q3. The spotlight has been on the weekly jobless claims, which dropped below one million for the first time since March. However, the University of Michigan’s preliminary August consumer confidence measure remained close to eight-year lows. Divisions between Republicans and Democrats over further fiscal stimulus persist. Further delay in policy support could result in derailing some of the gains in consumer spending.

Not helping

China’s latest data may again be indicating what awaits our own coronavirus recovery. Demand weakness appears to be holding back the nation’s rebound. Retail sales were off 1.1% year on year in July. That may not seem much, but Chinese retail sales customarily grow at 10% year on year. The rebound in industry continues to fare better, rising 4.8% year on year, about its pre-Covid pace. But another obstacle to recovery has arrived in the shape of flooding, contributing to higher prices. The regulator, meanwhile, has again been sounding the alarm over bad debts in the banking system, a whopping $0.5trn worth.

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