Economic Indicators, July 2020

Economic update: Is the UK beginning to bounce back?

The UK’s economy has begun to recover as lockdown measures are eased.

It’s still not clear how fast this recovery will be, and how much long-term damage has been done.

This Insight looks at the latest data for signs of increased economic activity alongside falling wages and Government plans for future public spending.

Economic activity is rising

According to Office for National Statistics (ONS) monthly estimates, GDP rose by 1.8% in May, following unprecedented falls in previous months. While there is some way to go to make up the losses (figures for March to May combined are still 19.1% lower than the previous quarter), it does seem likely that we are now climbing out of the recession.

There were also signs of recovery in retail sales figures, which rebounded in June to reach levels similar to before the lockdown. However, this recovery has not been evenly shared across the sector: sales in non-food stores are still well below their pre-pandemic levels.

Activity in both the manufacturing and services sectors appeared to be strengthening too. The Purchasing Manager’s Index measures for both are increasing from their previous lows.

Falling wages and higher unemployment

The unemployment figures for March to May this year have yet to show any significant changes, although this will be at least partly due to the Coronavirus Job Retention Scheme for furloughed workers.

However, we can see the pandemic’s effect on wages. Earnings fell by 0.3% in March to May 2020 compared to the previous year. They were rising by around 3% per year before the pandemic. This is likely due to many employees receiving lower wages while furloughed. As the chart below shows, low-paid industries (which have a high proportion of furloughed employees) have seen large decreases in average earnings.

The Job Retention Scheme is set to end on 31 October. As we mentioned in Coronavirus: Impact on the labour market, this scheme is very likely preventing large numbers of job losses for now. But the large increase in people claiming unemployment benefits, and decreases in paid employees and vacancies, means that higher unemployment and more redundancies are on the way.

High borrowing and (possibly) lower future spending

The high costs of the measures the Government has taken to slow the pandemic have caused a large increase in public sector borrowing. As shown in the chart below, from June 2019 to June 2020, the Government borrowed nearly £160 billion. This is more than it had borrowed in the previous three years put together. According to the Office for Budget Responsibility (OBR), the government’s borrowing (or deficit) could be as high as £370 billion this year (around 19% of GDP). This is the OBR’s “central scenario” – if the economy rebounds faster or slower the deficit could be anywhere between 15% and 23% of GDP.

This shift in the public finances has also led to changes in the Chancellor’s approach to the Comprehensive Spending Review. This was re-launched on 21 July having been postponed due to the pandemic. The review will set budgets for government departments for the next three years. These budgets are likely to be less generous than had originally been planned.

The Government said that departments have been asked to “identify opportunities to reprioritise and deliver savings.” It added: “in the interest of fairness we must exercise restraint in future public sector pay awards.” MPs, interest groups and members of the public are now able to submit policy ideas as part of the review.