Slow path to normality, still on track for more QE - Capital Economics
UK Economics

Slow path to normality, still on track for more QE

UK Economics Weekly
Written by Ruth Gregory

The government’s plans for a progressive opening up of non-essential stores in June suggest that the low point for the economy is behind us. But with the damage caused by the lockdown measures likely to weigh on the level of activity for some time, the road to recovery will be slow. That’s one reason why we think the Bank of England will need to loosen policy by more than the market is currently anticipating.

While this week’s high frequency data have confirmed that the low point for the economy is behind us, the figures have done little to alleviate our concerns that the recovery will be protracted.

The good news is that after giving the green light to some easing in the lockdown restrictions on 13th May, 8% of businesses previously closed have started trading again in the last two weeks. And according to Apple mobility data, there is more traffic on the roads than a few weeks ago, suggesting that people are travelling around more freely.

Meanwhile, the government has announced further progress towards re-opening the economy. On 15th June non-essential stores can reopen. Primary schools will open to reception, years 1 and 6 from Monday. And the Chancellor is set to announce that from 1st August companies will be asked to contribute between 20% and 25% to furloughed workers’ salaries.

Even so, the signs of improvement so far have been patchy. According to the May EC Economic Sentiment survey, there was only a small improvement in the balance of UK firms expecting a rise in activity. (See here.) The CBI’s retail “sales for the time of year balance” did not improve at all.

What’s more, an ONS survey shows that only a quarter of businesses expect to open their doors in the next two weeks. Retailers, such as Next and John Lewis, are reportedly planning to reopen just a fraction of their stores (5% and 25% respectively). So while activity may have improved since April, the economy is clearly still a long way from normality.

Perhaps our most immediate concern is that the winding down in the job furlough scheme will create a second wave of unemployment. (See here.) Soberingly, the government announced that by 24th May, 8.4 million people had been furloughed. If you add in the extra 2.3 million people currently receiving grants on the Self Employment Income Support Scheme, then the government is currently providing the livelihood of nearly 11 million workers, almost a third of all workers in the UK.

Michael Saunders this week became the latest Monetary Policy Committee (MPC) member to express his concern over the likelihood of high unemployment leading to greater economic scarring and a slower economic recovery than the Bank set out in its May scenario. He went one step further saying that “it is better to err on the side of somewhat too much stimulus rather than too little”. This supports our view that a likely £100bn expansion in quantitative easing (QE) at the MPC’s meeting on 18th June may not be the last, in contrast to the consensus forecast that the asset programme will by then be as big as it is going to get. (See here.)

Meanwhile, Brexit has reared its head again. The 30th June deadline for the extension of the transition period beyond December 2020 is now under five weeks away. But the UK’s chief trade negotiator, David Frost, has suggested that despite only a slim chance of a deal being reached by 1st July, the government won’t extend the transition period.

So the risk of “no deal, no extension” at the end of the year is clearly rising. (See here.) Ultimately, though, we suspect some fudge will prevent a big step change in UK-EU trading relations at the end of the year. This may be a fudge on the transition period – negotiations could be concluded this year, but an extension in the transition period allows businesses to prepare. Or there may be a fudge on a deal – a slim trade in goods deal is agreed but the can is kicked down the road on many other issues. Either way, with the talks likely to go down to the wire, the mood music will stay negative until late in the year.

The week ahead

A further slight easing in the lockdown restrictions will take place on Monday. Meanwhile, May’s final PMIs will probably confirm that the worst is now behind us.


Economic Diary & Forecasts

Upcoming Events & Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Consensus*

CE Forecasts*

UK Data Response

Mon 1st

UK

IHS Markit/CIPS Manufacturing PMI (May, Final)

(09.30)

40.6p

41.0

40.0

Tue 2nd

UK

Nationwide House Prices (May)

(07.00)

+0.7%(+3.7%)

-1.0%(+2.8%)

-1.0%(+2.8%)

UK

M4 Money Supply (Apr)

(09.30)

+2.8%(+8.1%)

UK

Net Consumer Credit (Apr)

(09.30)

-£3.8bn

-£4.5bn

-£4.0bn

UK

Mortgage Approvals (Apr)

(09.30)

56,200

28,000

6,000

Wed 3rd

UK

BRC Shop Price Index (May)

(00.01)

(-1.7%)

UK

IHS Markit/CIPS Services PMI (May, Final)

(09.30)

27.8p

28.1

28.0

UK

IHS Markit/CIPS Composite PMI (May, Final)

(09.30)

28.9p

29.4

29.0

Thu 4th

UK

New Car Registrations (May)

(09.00)

(-97.3%)

UK

IHS Markit/CIPS All-Sector PMI (May, Final)

(09.30)

13.4

28.0

DR

UK

IHS Markit/CIPS Construction PMI (May, Final)

(09.30)

8.2

30.0

20.0

DR

Fri 5th

UK

GfK Consumer Confidence (Jun, Flash)

(09.30)

-34

-34

-30

Selected future data releases and events

Fri 12th

UK

GDP (Apr, m/m(3m/3m))

(07.00)

DR

UK

Industrial Production (Apr)

(07.00)

DR

UK

Trade Balance (Apr)

(07.00)

DR

*m/m(y/y) unless otherwise stated p = provisional/flash

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts**

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

Latest

Q1 2020

Q2 2020

Q3 2020

Q4 2020

2019

2020

2021

2022

GDP

-2.0(-1.6) (Q1)

-2.0(-1.6)

-23.0(-24.1)

+15.1(-13.2)

+4.5(-9.2)

(+1.4)

(-12.0)

(+10.0)

(+3.7)

CPI inflation

(+0.8) (Apr)

(+1.7)

(+0.7)

(+0.5)

(+0.7)

(+1.8)

(+1.0)

(+1.0)

(+1.6)

ILO unemployment rate (%)

3.9 (Mar)

3.9

8.5

8.0

6.5

3.8

7.0

5.7

5.3

Bank rate, end period (%)

0.10

0.10

0.10

0.10

0.10

0.75

0.10

0.10

0.10

10 yr gilt, end period (%)

0.19

0.35

0.25

0.25

0.25

0.82

0.25

0.25

0.50

$/£, end period

1.23

1.24

1.26

1.25

1.25

1.33

1.25

1.30

1.30

Euro/£, end period

1.11

1.13

1.13

1.13

1.14

1.18

1.14

1.24

1.24

Sources: Capital Economics, Refinitiv

** Assumes that the restrictions on activity created by the coronavirus lockdown last for three months from late March to late June. Assumes the UK and the EU agree to extend the Brexit transition period for a year from 31st December 2020 and strike some sort of trade deal thereafter perhaps in a step-by-step approach. (See here.)


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