As coronavirus restrictions eased through May and June, the UK’s economic recovery continued to surpass expectations.

This Insight summarises the latest economic data and analyses what it means for growth in the coming months.

Restrictions ease in April boosting service industries

The reopening of non-essential retail (such as clothing and leisure stores) and outdoor hospitality businesses in April, led to a third consecutive month of growth in GDP. Monthly economic output was up 2.3% in April 2021 compared to March.

Growth was particularly strong for service industries such as retail, hospitality and ‘other personal services’ (including hair and beauty salons) that reopened in April.

GDP remained 3.7% below February 2020. Overall, the economy has been more resilient during early 2021 compared to the first lockdown and has since grown faster than most economists expected.

Two charts show percentage change in UK GDP each month between March 2020 and April 2021, and economic output per sector change since February 2020.

Strong recovery likely to continue through May and June

Business surveys indicate that strong growth continued throughout May and June as restrictions eased and people could meet indoors. Markit’s Purchasing Managers’ Index (PMI) figures for both the services and manufacturing sectors reported strong expansion in June, only slightly below the record-highs reported for May.

Consumer spending also looks to be strong for May and June. GfK’s Consumer Confidence Index matched early 2020 levels in May and remained at that level in June.

Although retail sales fell slightly in May, this followed very strong monthly growth in April. Also, the fall in sales was mostly in grocery stores, which suggests consumer spending shifted to meals eaten out. Overall, retail sales were 9.1% higher in May 2021 than in February 2020.

Inflation continues to rise

As demand for goods and services rose in May, so did inflation. Consumer Price Inflation (CPI) rose by 2.1% in May 2021, the highest since July 2019 and above expectations. The CPI is now above the Bank of England’s 2% target.

The inflation increase was driven by the higher price of fuel, clothes, recreational goods (such as games, toys and music downloads), and meals eaten out. The CPI rate is also affected by base effects, with low prices of some items in 2020, such as oil, now leading to very strong annual growth.

Although some economists have cautioned about the consequences of long-term rising inflation, the Bank of England’s Monetary Policy Committee think this rise will be short-term. After its June policy meeting, the Committee said it expects inflation to rise further and was “likely to exceed 3% for a temporary period” before returning back to 2% in the medium term. It said it would not tighten its monetary policy in response yet but would “continue to monitor the situation closely”.

Some industries are reporting staff shortages

Employment and unemployment figures also showed promising signs of recovery in April. The unemployment rate fell to 4.7% in the three months to April, down from 5.0% for the previous quarter (but is still above pre-pandemic levels).

The employment rate was estimated at 75.2%, up slightly from 75.0% the previous quarter. The Office for National Statistics estimated that around 1.5 million jobs were on furlough in early June, the lowest since the scheme began.

Two charts showing change in UK employment and unemployment rate between Jan 2019 and April 2021, and online job adverts per month in 2019, 2020, and 2021.

The number of job vacancies increased in the three months to May, as did job adverts online. The number of vacancies and ads were particularly high for the hospitality and transport/logistics sectors. Hospitality businesses reported staff shortages as they reopened, particularly of chefs and front-of-house staff.

Hospitality trade body, UK Hospitality, said there were several factors contributing to staff shortages, including workers leaving for jobs in other industries and foreign workers not returning to the UK due to travel restrictions.

The Resolution Foundation think tank highlighted that, although there are promising signs that the labour market is improving, total hours worked are still low compared to pre-pandemic levels. The Foundation warned that full recovery from the pandemic has a long way to go.

Optimism largely unaffected by delay to lifting all lockdown restrictions

Overall, these early estimates suggest that economic recovery will continue to be better than expected throughout 2021. In its June meeting, the Bank of England Monetary Policy Committee upgraded its GDP growth expectations for the second quarter of 2021 from 4.25% to 5.50%.

This optimism has so far been unaffected by the extension of lockdown restrictions to July. Many economists think this delay will have limited effect  on overall economic output, particularly when compared with the large falls seen earlier in the pandemic.

The extension has, however, prompted calls from businesses for extensions to support measures. In particular, businesses connected to international travel and large events continue to face significant restrictions on their trade. In April 2021, travel agents’ monthly business turnover was 85% below pre-pandemic levels. In comparison, food and accommodation business turnover had recovered to 37% below pre-pandemic levels.

Rishi Sunak told the Financial Times that he would not extend support  such as the furlough scheme and business rates relief, saying that potential delays had been considered when schemes were extended in March 2021.

About the author: Georgina Hutton is a researcher at the House of Commons Library.

Photo by dapiki moto on Unsplash

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