EC Economic Sentiment (Jul.) - Capital Economics
UK Economics

EC Economic Sentiment (Jul.)

UK Data Response
Written by Ruth Gregory

The jump in the UK Economic Sentiment Indicator (ESI) in July is an encouraging sign that the recovery continued at a decent pace at the start of Q3. Even so, rising unemployment is likely to put a brake on the recovery later this year. And a resurgence in virus cases poses a major risk to the outlook.

Further signs the recovery continued in July

  • The jump in the UK Economic Sentiment Indicator (ESI) in July is an encouraging sign that the recovery continued at a decent pace at the start of Q3. Even so, rising unemployment is likely to put a brake on the recovery later this year. And a resurgence in virus cases poses a major risk to the outlook.
  • The rise in the ESI from 65.2 in June to 75.5 in July is clearly good news and chimes with the evidence from the high frequency data that the recovery that began in May has continued at the start of Q3. This leaves the indicator consistent with a fall in annual GDP growth of around 3%. But economic sentiment is still well below February’s level. And like other surveys, the ESI has done a poor job in predicting the depth of the recession. (See Chart 1.) So it is unlikely to be telling us much about the precise pace of the recovery.
  • It also difficult to glean much useful information from comparisons across countries. The larger rise in the UK ESI in July compared to its euro-zone counterpart – the latter picked up from 75.8 in June to 82.3 – probably has more to do with the later re-opening of the UK economy (i.e. more of it happened in July) rather than the UK having recovered quicker overall. Indeed, the UK ESI remains below the level of the ESI in the euro-zone.
  • Nevertheless, it does tell us something about the extent to which economic conditions are improving across sectors, with firms in the retail and industrial sectors more upbeat about the prospects for demand than those in the services sector. (See Chart 2.) And with households becoming less pessimistic about the outlook for their finances, this suggests that the gains in the retail sector won’t go into reverse. (See Chart 3.)
  • Meanwhile, the employment expectation balances in the retail, services and industrial sectors have turned a corner. (See Chart 4.) But these balances remain subdued and households’ unemployment expectations deteriorated again in July. Overall, the ESI suggests that the recovery continued at the start of Q3. But the next leg is likely to be slower, particularly if, like overseas, the UK suffers a renewed surge in virus cases and more localised lockdowns. (See here.)

Chart 1: UK ESI & GDP

Chart 2: Current & Expected Demand

Chart 3: Consumers’ Finances & Retail Sales

Chart 4: Employment Expectations (% Balances)

Sources: Refinitiv, European Commission, Capital Economics


Ruth Gregory, Senior UK Economist, +44 7747 466 451, ruth.gregory@capitaleconomics.com