The UK economic downturn caused by the COVID-19 crisis seems to have bottomed out in April, with economic activity subsequently recovering gradually in May and June. However, the level of GDP in May remained far below its pre-virus peak, and Q2 2020 is still expected to have seen the sharpest quarterly fall in output in modern history.
Looking ahead, the phased reopening of the UK economy seems set to support a firming of activity in Q3 2020. However, the pace and sustainability of growth will depend primarily on the continued suppression of COVID-19. Upswings in cases in many countries – including those that, until recently, seemed to have had the outbreak under control – demonstrates how fragile an economic recovery can be without an effective vaccine and/or treatment.
The CBI Economics team continues to gather evidence on the impact of COVID-19 on UK businesses, which has enabled us to collaborate with the UK government to help businesses overcome the challenges they face. View the CBI’s breakdown of financial support for more information on schemes available to support business’ cashflow.
Key economic findings
How did the UK economy progress in Q2 2020?
Following a record decline in April of -20.4% month-on-month (m/m), UK GDP saw a slight recovery of 1.8% m/m in May. This gradual pace disappointed consensus expectations of a stronger recovery of 5.5% m/m and left the level of GDP 25% below its pre-virus peak in February. Looking at the sectoral breakdown, construction (8.2% m/m) and industrial production (6.0% m/m) saw quicker month-on-month recoveries than services (0.9% m/m). This divergence reflected the restarting of manufacturing and construction operations in May, while most consumer-facing services sectors remained under lockdown until June or July. Despite the gradual recovery, output levels across construction, industrial production, and services remained far below their pre-virus peak (19%, 39%, and 24% below, respectively).
Activity in June is expected to have improved from May as lockdown measures were relaxed further (most notably with the reopening of all non-essential retailers on 15 June). High frequency indicators – such as credit card payment data, mobility, and Google searches related to spending – suggest a pick-up in consumer spending. For example, Bank of England analysis of credit card payment data suggested that aggregate spending in late June recovered to around 10% below its pre-virus level. However, the IHS Markit/CIPS Composite Purchasing Managers Index reported that business activity remained more subdued.
While the full extent of the decline in output over Q2 2020 will not be known until the ONS releases its first estimate of GDP on 10 August, Q2 is still set to have seen the sharpest quarterly contraction in output since the eighteenth century. The CBI Growth Indicator reported that private sector activity fell at a record pace in the quarter to June, with firms separately responding that output had been 63% lower than ‘normal’ since lockdown measures came into force. Chiming with this, the Bank of England’s June Decision Maker Panel (DMP) found that firms expected sales in Q2 to be 38% lower than ‘normal’.
UK labour market conditions deteriorated as economic activity fell over Q2 2020. Although the Job Retention Scheme (JRS) cushioned much of the hit to headline employment figures (as the data includes people on temporary leave), the impact of the COVID-19 crisis could be observed in other data. For example, the number of employees on payroll dropped by 649,000 between March and June 2020, while vacancies in April to June fell to their lowest level since records began in 2001. Furthermore, weekly hours worked between March to May saw their largest annual decrease since estimates began in 1971. Concerns about worsening labour market conditions have been amplified by the potential for widespread job losses as the JRS is wound down in the autumn.
What is the current UK economic outlook?
The gradual pace of the UK’s economic recovery in May and June has prompted some forecasters to adjust their estimates to take into account the possibility of a longer-running economic malaise. In this scenario, the UK would not return to its pre-crisis level of GDP until much later than previously expected, which would be in line with what economists call an “L” or “swoosh”-shaped recovery (as opposed to what many initially thought would be a rapid “V”-shaped recovery). This view was reflected in the OBR’s July central scenario, which suggests that the UK may not return to its pre-crisis level of GDP until the end of 2022.
Overall, the average of economic forecasts at the end of June 2020 expects GDP to fall by -8.5% year-on-year (y/y) in 2020 and then to grow by 6.1% y/y in 2021. By comparison, the OBR’s central scenario assumes that GDP falls by -12% y/y in 2020 before growing by 9% y/y in 2021.
What is our view going forward?
The UK’s nascent economic recovery seems set to broaden in Q3 2020 as more sectors begin to reopen, such as accommodation, food services, and recreation. Furthermore, fiscal support from the UK government – which was broadened in the Chancellor’s July summer statement – and loose monetary policy will provide a further boost to businesses and households.
However, the ongoing COVID-related uncertainty means that many businesses remained acutely concerned about their prospects going forward. Indeed, the June CBI Growth Indicator reported that 74% of firms see lack of demand from customers/clients as an operational challenge in restarting their business. This weakness in confidence will likely limit the pace at which firms begin to operate at what might come close to full capacity, especially given the constraints of social distancing measures.
As always, the continued improvement of the UK economy relies heavily on successful public health outcomes. The re-imposition of lockdown measures in countries that have seen a recent upswing in cases (most notably, the US) demonstrates how shaky the foundation of an economic recovery can be if the spread of COVID-19 is not successfully controlled. It is also worth noting that a no deal Brexit would be a further stranglehold on the UK’s recovery going into 2021.
The crisis also presents the potential for economic ‘scarring’, whereby job losses, business closures, and reduced investment would damage the UK economy in the longer-term. The potential for widespread job losses has become an acute concern, particularly as the JRS is set to end in October 2020. A sharp fall in employment could potentially impact the UK’s future productive capacity, especially if workers choose to drop out of the labour force (rather than find a new job). This concern is behind the jobs support package announced as part of the Chancellor’s Summer Statement; however, some firms have raised questions about how effective policies like the Job Retention Bonus might prove to be in stimulating job creation.
What does this mean for UK businesses?
The pace of UK’s economic recovery will depend heavily on the path of the COVID-19 pandemic, as this will dictate the extent to which social distancing measures and government support schemes are unwound.
The impact of the COVID-19 crisis varies by sector and across companies. Therefore, firms should be aware that some parts of their supply chain may be relatively more impacted than others.
Firms should continually review their business planning to consider their ability to operate effectively under social distancing rules, while also considering the potential impact of businesses and households’ changing behaviour.