Slowdown in recovery will force policymakers to do more - Capital Economics
UK Economics

Slowdown in recovery will force policymakers to do more

UK Economics Weekly
Written by Ruth Gregory

After the 8.7% m/m gain in GDP in June, another surge as the economy re-opened in July is already baked in the cake. But the high frequency indicators have provided the first signs that the pace of the recovery is starting to ease. And the economy is now running into the first of the speed bumps that we highlighted could derail the nascent recovery. As a result, we think that policymakers have more work to do.

After the 8.7% m/m gain in GDP in June, another surge as the economy re-opened in July is already baked in the cake, perhaps of 7.5% m/m according to our CE BICS Indicator. (See here.) But while this rise sounds impressive, GDP would still be 11% below its pre-virus level. And the high frequency indicators have provided the first signs that the pace of the recovery is starting to ease. (See here.)

The rise in the number of new virus cases in the UK has been small so far compared to those in the US, France and Spain. (See here.) And if there were a sharp rise, we think that this would be more likely to hold back the recovery rather than cause another deep recession. (See here.)

Meanwhile, we are not too concerned about the early signs that the retail recovery has slowed in August. The sector has now recovered the ground lost during the lockdown, so we would expect any further gains to be more limited. And the slide in the CBI’s “sales for time of year” survey balance, which points to a 1% or so m/m fall in retail sales in August, may reflect a shift in spending away from retail and back towards consumer services. (See here.)

Even so, the economy is now running into the first of the speed bumps that we highlighted could derail the nascent recovery. (See here.) The Eat Out to Help Out scheme, which has caused a 16% y/y surge in the number of diners so far in August, ends on Monday. (See here.) The Financial Conduct Authority advised this week that there will be no extension beyond 31st October for applications for the three-month mortgage holiday. And despite the extension of Germany’s job retention scheme until end-2021 and the extension of the current terms in France’s Chômage Partiel to 1st November, there have been few signs that a continuation of the UK scheme is in the offing. We estimate that the scheme was still supporting about 4 million workers at the start of August.

So it came as no surprise that the Q3 employment balance of the CBI’s services sector survey fell to its lowest since the series began in 1999. That is consistent with the 2.3% q/q fall in employment in Q3 that we expect. (See Chart 1.) Nor is it surprising that the prospect of rising job losses is weighing more heavily on household confidence. (See here.)

Chart 1: Employment & CBI Services Sector Survey

Sources: Refinitiv, Capital Economics

Policymakers have more work to do

That is not to say that the recovery won’t continue. But with job losses mounting, we think that both the Chancellor and the Bank of England will have to loosen policy further later this year. We suspect the Chancellor will step in over the coming months and announce more support for workers in hard-hit sectors. Large amounts of spare capacity in the labour market will probably keep inflation closer to 1.5% than the 2% the Bank anticipates, prompting the MPC to announce another £100bn of QE in November. And while the MPC has not gone so far as to adopt an average inflation target like the US Fed (see here), its guidance that rates won’t be raised until inflation is on its way back to 2%, make us more confident in our view that rates will stay at +0.10% for the next five years. (See here.)

The week ahead

We will get a clearer idea of the MPC’s latest thinking from Bank Governor Andrew Bailey’s opening remarks at the Jackson Hole Symposium (14:05 BST today) and from the plethora of speeches by MPC members next week. August’s money and credit figures (due on Tuesday) will probably provide further signs that business and household borrowing rates are moving back towards normal.


Economic Diary & Forecasts

Upcoming Events & Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Consensus*

CE Forecasts*

UK Data Response

Mon 31st

August Bank Holiday – Markets Closed

Tue 1st

UK

IHS Markit/CIPS Manufacturing PMI (Aug, Final)

(09.30)

55.3p

55.3

55.3

UK

Money Supply M4 (Jul)

(09.30)

+1.0%(+13.1%)

+0.5%(+12.9%)

DR

UK

Net Consumer Credit (Jul)

(09.30)

-£0.1bn

+£1.0bn

+£0.5bn

DR

UK

Mortgage Approvals (Jul)

(09.30)

+40,000

+55,000

+55,000

DR

UK

House of Commons returns from Summer recess

Wed 2nd

UK

BRC Shop Price Index (Aug)

(00.01)

-1.6%(-1.3%)

UK

Treasury Committee interviews MPC members

(14.00)

UK

MPC’s Broadbent and Haldane keynote speech

(15.30)

Thu 3rd

UK

IHS Markit/CIPS Composite PMI (Aug, Final)

(09.30)

60.3p

60.3

60.3

UK

IHS Markit/CIPS Services PMI (Aug, Final)

(09.30)

60.1p

60.1

60.1

UK

MPC’s Bailey speaks on future of cryptocurrencies

(15.00)

Fri 4th

UK

New Car Registrations (Aug)

(09.00)

(+11.3%)

UK

IHS Markit/CIPS Construction PMI (Aug)

(09.30)

58.1

59.0

58.1

UK

IHS Markit/CIPS All-Sector PMI (Aug)

(09.30)

57.1

60.0

UK

MPC’s Saunders speaks on economic performance

Selected future data releases and events

Fri 11th

UK

GDP (Jul)

(07.00)

+8.7%(-20.4%)

DR

UK

Services Output (Jul)

(07.00)

+7.7%(-17.1%)

DR

UK

Industrial Production (Jul)

(07.00)

+9.3%(-12.5%)

DR

UK

Manufacturing Output (Jul)

(07.00)

+11.0%(-14.6%)

DR

UK

Construction Output (Jul)

(07.00)

+23.5%(-24.8%)

DR

UK

Trade Balance (Jul)

(07.00)

+£5.3bn

DR

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

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

-20.4(-21.7) (Q2)

-2.2(-1.7)

-20.4(-21.7)

+17.0(-8.9)

+3.3(-5.9)

(+1.5)

(-9.5)

(+9.0)

(+3.3)

CPI inflation

(+1.0) (Jul.)

(+1.7)

(+0.6)

(+0.5)

(+0.4)

(+1.8)

(+0.8)

(+1.3)

(+1.4)

ILO unemployment rate (%)

3.9 (June)

3.9

3.9

5.1

6.2

3.8

4.8

6.6

5.4

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 (%)

0.35

0.36

0.17

0.20

0.15

0.83

0.15

0.15

0.15

$/£, end period

1.33

1.24

1.25

1.30

1.35

1.33

1.35

1.35

1.35

Euro/£, end period

1.11

1.14

1.11

1.12

1.13

1.18

1.13

1.13

1.13

Sources: Capital Economics, Refinitiv

* Assumes the UK and the EU agree a slim trade in goods deal by the end of the year, with the status quo for services and financial services maintained until a later date. (See here.)


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