As the lockdown eases the global economy is starting to come back to life. Last week’s better than expected US jobs numbers, and a surge in private sector activity in China, reinforced the view in equity markets that the worst is past. On Friday the US S&P500 equity index closed up almost 40% on its March lows.
The economic numbers around the world paint a much more cautious picture. In the UK activity is stirring not bouncing.
The UK started to emerge from lockdown on 13 May, with people who are unable to work at home ‘actively encouraged’ to return to work. Since 1 June schools have started to reopen as have car showrooms and open-air markets. From next Monday all non-essential shops will be allowed to get back to business.
Real-time transaction data from credit card providers and banks shows that UK consumer spending has risen since April. Despite the pickup research group Fable Data notes that household spending in the final week of May was 18.5% lower than in the equivalent week of 2019. With the reopening of the housing market on 13 May property group Zoopla reported a sharp rise in the number of active enquiries. There are also tentative signs of an increase in shipping coming through UK ports.
Road traffic data presented at the daily No10 press conference offers perhaps the clearest sign of a stirring of life. Traffic volumes, which dropped to 25% of normal levels in April, are running at around 70% of normal levels. Rail, bus and tube traffic, by contrast, have seen only slight increases, and are still running at less than 20% of normal levels.
Businesses are slowly reopening. An Office for National Statistics (ONS) survey found that 81% of companies were operating in May up from 75% in late March and early April. 24% of businesses that had suspended trading were planning to resume operations before mid-June.
Work is resuming under new, more restricted conditions. Social distancing and consumer caution will dampen activity and challenge the viability of some businesses. People are heeding the government’s injunction to avoid public transport, but doing so weighs on activity. From 8 June most people entering the UK by plane, ferry or train will be subject to a 14-day quarantine. The risk of new outbreaks, and the reimposition of lockdowns, will remain until the virus is eliminated or disappears.
Data released on Friday offers some encouragement on this front, showing falling levels of infection in England. The ONS study, which involves swab testing a sample of households, suggests that one in 1,000 people had COVID-19 in the community between 17 and 30 May. The figures, which exclude hospitals and care homes, have dropped from a rate of one in 400 between 26 April and 8 May. The ONS also found that people who worked outside the home had 3.5 times higher estimated COVID-19 rates than those who worked from home.
Even as the return to work gathers pace the lagged effects of earlier weakness will become increasingly apparent. Some jobs that were preserved by the furlough scheme will be lost as businesses reassess prospects. Lower levels of demand, social distancing and high debt will weigh on many businesses. Unemployment and business insolvencies are likely to rise as the lockdown is eased.
For all of these risks we are forecasting what, by normal standards, would be extraordinarily strong growth in the third and fourth quarters of this year. Assuming a continued gradual easing of restrictions and no resurgence in cases we expect GDP to rise by 7.8% in July-September and by 4.2% in October-December.
But this represent only a partial recovery from the huge decline in March-April, of perhaps 20-30%. Despite a prospective rebound we expect the UK economy at the end of this year to be 10.8% smaller than at the end of 2019. The hole in the economy made by COVID will take time to fill. Other countries face the same problem.
Governments and central banks recognise that much more needs to be done to ensure recovery.
Last week the German government became the first major European government to launch a post-COVID stimulus package worth €130bn, with extra spending, tax cuts and help to business. Other governments are likely to follow; on Friday the UK Treasury said it is considering announcing a further package of measures to support the economy in July. More substantial stimulus is likely be pushed back to the autumn when there is more clarity on the position of the UK economy.
Last Thursday the European Central Bank announced a significant increase in its programme of quantitative easing designed to bolster growth. Having initially said that the Bank of England was not “planning or contemplating” negative interest rates, its governor, Andrew Bailey, last month told MPs that the idea was under “active review”.
The recovery will need more help. Yet, reduced and shaky though it is, the UK economy is starting to recover.