Lost summer holiday season won’t delay GDP rebound - Capital Economics
UK Economics

Lost summer holiday season won’t delay GDP rebound

UK Economics Weekly
Written by Ruth Gregory

The possibility that international travel restrictions could remain in place this summer implies that the rapid vaccine rollout in the UK won’t be enough to ensure a swift return to normality for the hard-hit tourism sector. But this is unlikely to delay the rapid recovery in the overall economy we expect in the second half of 2021. Meanwhile, the economy’s recent performance suggests that the hole the economy needs to climb out of isn’t as large as many had anticipated.

The possibility that international travel restrictions could remain in place this summer implies that the rapid vaccine rollout won’t be enough to ensure a swift return to normality for the hard-hit tourism sector. But this is unlikely to put a huge dent in the UK economy. Nor is it likely to delay the rapid recovery we expect in the second half of 2021.

This week brought further signs that travel restrictions could remain a major source of uncertainty for would-be holidaymakers both coming to and leaving the UK this summer. After all, the government suggested this week that countries could be added “within a few hours” to the “red list” of countries from which returning passengers must isolate for 10 days. And the Transport Secretary, Grant Shapps, has said the UK could have to wait for other countries to catch up in rolling out their vaccines in order to lift these international restrictions.

Of course, international travel restrictions were always likely to remain in place longer than domestic ones. And while this will be of little reassurance to the tourism industry and will increase the pressure on the government to support the industry in the Budget on 3rd March, there are two main sources of comfort.

First, the tourist sector is small relative to the total economy. Foreign tourism directly accounted for just 0.5% of 2019 GDP, even before the pandemic crushed it. After including the indirect impact (such as through supply chains, investment and the spending of employees in the sector), the total contribution rises to just 1.6%. In fact, domestic tourists are five times more important for the tourism industry, accounting for about 7.5% of GDP. (See Chart 1.) So the UK stands to lose far less than many of its European counterparts.

Second, the domestic tourist sector may pick up some of the slack. And since UK residents usually spend more money abroad than foreign visitors do in the UK, there could be some favourable substitution effects. (See here.)

Chart 1: Tourism as a % of GDP, 2019

Source: World Travel and Tourism Council

So longer-lasting travel restrictions are unlikely to throw a rapid rebound in the economy off course once the COVID-19 restrictions are eased from Q2. Instead, it’s more important to have the domestic economy open than the international tourism one.

We can take some encouragement too from the economy’s recent performance. Upward revisions to the back data has suggested that in real terms, the economy was in December “only” 6.3% below its pre-crisis level. And the nominal GDP figures, which do not suffer from as many measurement issues as the real data (see here), suggest that it was 2.1% below its Q4 2019 level, just like Germany. This suggests that the hole the UK economy needs to climb out of isn’t nearly as large as we and many others had anticipated. (See here.)

The week ahead

The release of January’s retail sales figures on Friday will probably show that the third lockdown took its toll on consumer spending. The Flash PMIs (also due on Friday) may imply that February was not much better. Finally, we have revised up our gilt yield and sterling forecasts. Full details for clients of the UK Markets service will be in our UK Markets Outlook on Monday.


Data Previews

Consumer Prices (Jan.) Wed. 17th Feb.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

Consumer Prices m/m(y/y)

07.00

+0.3%(+0.6%)

-0.4%(+0.5%)

-0.4%(+0.5%)

Core Consumer Prices m/m(y/y)

07.00

+0.3%(+1.4%)

-0.7%(+1.3%)

-0.6%(+1.4%)

Inflation probably stayed low, but there are three wildcards

We estimate that CPI inflation fell from 0.6% in December to 0.5% in January and that core inflation stayed at 1.4%. But three wildcards mean the chances of a surprise are much greater than usual.

Wildcard one is how much discounting there was during January’s lockdown. We’ve pencilled in a 1.6% m/m fall in clothing prices. That is smaller than the usual January drop of about 4.5% m/m based on idea that the lockdown prevented “January sales”. But it could go the other way if online retailers discounted more heavily than usual to lift demand. That affects wildcard two as the ONS will use the price change of “available” items to impute prices for items that the lockdown rendered “unavailable”, such as airfares. So if our estimates for the prices of “available” items is wrong, that error is multiplied. Wildcard three is that the ONS will update the weights for some of the shifts in spending patterns in 2020. We estimate that will reduce CPI inflation by 0.1%, but the effect could be bigger.

Either way, CPI inflation will jump in April, perhaps to 1.9%. (See Chart 2.) That’s due to effects already baked in the cake, such as the end of the hospitality VAT cut and the effect of last year’s fall in fuel prices dropping out of the annual comparison.

Chart 2: CPI Inflation (%)

Sources: Refinitiv, Capital Economics

Retail Sales (Jan.) Fri. 19th Feb.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

Retail Sales Volumes (Including Petrol)

07.00

+0.3%(+2.9%)

-2.0%(+0.3%)

-1.0%(+1.1%)

Third lockdown adds to January blues for retailers

Retail sales probably fell slightly in January as the third lockdown took its toll on consumer spending.

After a tiny 0.3% m/m rise in December, as most of the country was placed into tier 4, the third COVID-19 lockdown probably caused retail sales to fall again. Indeed, the BRC retail sales survey suggests that retail sales volumes were flat year-on-year. (See Chart 3.) That would equate to a drop of about 2% m/m. What’s more, data from Barclaycard point to a much sharper fall in total consumption of about 16% y/y.

However, the latter is capturing the weakness in non-retail spending. And consumers probably ramped up their online spending again, meaning that retail sales probably didn’t fall that far.

Overall, we have pencilled in a 1.0% m/m fall in retail sales volumes in January. And things probably won’t start to significantly improve until COVID-19 restrictions are eased, potentially in the spring.

Chart 3: BRC Total Sales & Retail Sales Volume

Sources: Refinitiv, BRC, Capital Economics

Public Finances (Jan.) Fri. 19th Feb.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

PSNB ex. Banking Groups

07.00

+£34.1bn

+£24.0bn

+£35.0bn

Public Sector Net Cash Requirement

07.00

+£23.9bn

+£39.3bn

Borrowing set to soar in January and remain elevated in Q1

Borrowing probably rose by more again in January as the third lockdown kept many businesses closed and spending on the vaccine rollout ramped up.

We think that the number of people on the furlough scheme rose to about 6m in January up from about 3.9m in December, which would have cost just over £6.0bn in total. The £4.6bn of additional lockdown grants for businesses forced to close and spending on the vaccine rollout will have added even more. At the same time, the 2% m/m contraction in GDP we forecast in January will have weighed on tax receipts. And the record 1.8m people missing their tax return deadline will have reduced receipts in January when self-assessment income taxes are typically paid. That may mean that the government borrowed £35.0bn, with a corresponding cash (PSNCR) deficit of £39.3bn.

And with many firms set to remain closed for a few more months, this is likely to set the tone for Q1. We forecast that the deficit will reach £420bn (19.6% of GDP) in 2020/21, well above the OBR’s November projection of £394bn. (See Chart 4.)

Chart 4: Year-to-Date PSNB ex. Banks (£bn)

Sources: Refinitiv, OBR, Capital Economics

IHS Markit/CIPS Activity Flash PMIs (Feb.) Fri. 19th Feb.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

Flash Composite PMI

09.30

41.2

43.0

47.0

Flash Manufacturing PMI

09.30

54.1

53.0

55.0

Flash Services PMI

09.30

39.5

41.5

45.0

Services activity remains subdued

The flash composite PMI may have risen in February, but economic activity probably remained subdued.

Given that the COVID-19 restrictions were the same in February as in January, it seems unlikely that activity in the services sector picked up much. But as the PMIs measure activity compared to the previous month, in theory the services PMI should have rebounded to 50.0, which indicates no change. That said, the poor weather, particularly in the north of the UK, and negative sentiment probably blunted the rebound. As such, we expect the flash services PMI to rise from 39.5 in January to 45.0 in February.

Meanwhile, the manufacturing sector has continued to operate as normal and activity may have picked up after a Brexit induced dip in January, meaning we think the flash manufacturing PMI may rise from 54.1 in January to 55.0 in February. This would be in line with its average over the previous six months. Overall, we think the flash composite PMI will rise to 47.0. That would be consistent with a 0.5% m/m change in GDP in February. (See Chart 5.)

Chart 5: GDP & IHS Markit Flash Composite PMI

Sources: IHS Markit, Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events & Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Consensus*

CE Forecasts*

Data Response

Mon 15th

UK

Rightmove House Prices (Feb)

(00.01)

-0.9%(+3.3%)

Tue 16th

No Significant Data Released

Wed 17th

UK

CPI (Jan)

(07.00)

+0.3%(+0.6%)

-0.4%(+0.5%)

-0.4%(+0.5%)

DR

UK

Core CPI (Jan)

(07.00)

+0.3%(+1.4%)

-0.7%(+1.3%)

-0.6%(+1.4%)

DR

UK

CPIH (Jan)

(07.00)

+0.2%(+0.8%)

-0.3%(+0.7%)

-0.5%(+0.6%)

DR

UK

RPI (Jan)

(07.00)

+0.6%(+1.2%)

-0.4%(+1.3%)

-0.4%(+1.2%)

DR

UK

PPI Input (Jan)

(07.00)

+0.8%(+0.2%)

+0.5%(+0.6%)

+0.5%(+0.6%)

DR

UK

PPI Output (Jan)

(07.00)

+0.3%(+0.2%)

+0.2%(-0.4%)

+0.2%(-0.4%)

DR

UK

House Price Index (Dec)

(09.30)

(+7.6%)

UK

MPC’s Ramsden speaks about QE

(16.00)

Thu 18th

No Significant Data Released

Fri 19th

UK

GfK Consumer Confidence (Feb)

(00.01)

-28

-25

-24

UK

Retail Sales Inc Fuel (Jan)

(07.00)

+0.3%(+2.9%)

-2.0%(+0.3%)

-1.0%(+1.1%)

DR

UK

PSNB ex. Banking Groups (Jan)

(07.00)

+£34.1bn

+£24.0bn

+£35.0bn

DR

UK

Central Gov. Net Cash Requirement (Jan)

(07.00)

+£23.9bn

+£39.3bn

DR

UK

IHS/CIPS Composite PMI (Feb, Flash)

(09.30)

41.2

43.0

47.0

DR

UK

IHS/CIPS Manufacturing PMI (Feb, Flash)

(09.30)

54.1

53.0

55.0

DR

UK

IHS/CIPS Services PMI (Feb, Flash)

(09.30)

39.5

41.5

45.0

DR

UK

CBI Industrial Trends Survey (Feb)

(11.00)

-38

Selected future data releases and events

Mon 23rd

UK

Labour Market (Nov./Dec.)

(07.00)

DR

Also expected during this period:

28th – 3rd

UK

Nationwide House Prices (Feb)

(07.00)

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts*

%q/q(%y/y) unless stated

Latest

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

2020

2021

2022

GDP

+1.0(-7.8)(Q4)

+16.1(-8.7)

+1.0(-7.8)

-2.3(-7.3)

+3.0(+18.0)

+4.0(+5.7)

+1.5(+6.2)

(-9.9)

(+5.0)

(+6.5)

CPI inflation

(+0.6) (Dec)

(+0.6)

(+0.5)

(+0.6)

(+2.0)

(+2.1)

(+2.5)

(+0.9)

(+1.8)

(+1.5)

ILO unemployment rate (%)

5.0 (Nov)

4.8

5.2

5.5

5.9

6.2

6.5

4.5

6.1

5.6

Bank rate, end period (%)

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

10 yr gilt, end period (%)

0.47

0.25

0.39

0.54

0.60

0.67

0.75

0.39

0.75

1.00

$/£, end period

1.38

1.29

1.37

1.38

1.40

1.43

1.45

1.37

1.45

1.45

Euro/£, end period

1.14

1.10

1.12

1.14

1.15

1.15

1.16

1.12

1.16

1.16

Sources: Capital Economics, Refinitiv

* Assumes that severe COVID-19 restrictions are in place during January, February and March, that restrictions are eased gradually in April, May and June and that a rapid rollout in vaccines means few restrictions are required beyond June. (See here.)


Ruth Gregory, Senior UK Economist, +44 (0)7747 466 451, ruth.gregory@capitaleconomics.com