Economic Indicators, August 2020

Largest recession on record but signs of recovery

On 12 August the Office for National Statistics (ONS) released its official monthly estimate of GDP, showing the biggest quarterly fall on record.

As the chart below shows, in April to June economic output had fallen by 20.4%, compared to the previous quarter. This followed a fall of 2.2% in January to March.

_{Source: ONS, GDP monthly estimate, UK: June 2020, 12 August 2020}

The UK may, however, now be past the worst. Looking at monthly figures, the contraction of the economy ended in April, and in May and June there was growth of 2.4% and 8.7%.

This Insight looks at the impact the pandemic continues to have on the economy, and discusses some signs of a possible recovery.

Highest borrowing on record

The Government has borrowed large amounts to cover both its own higher spending and the lower tax revenues from a weak economy.

Total government borrowing from April to July 2020 was estimated at £150.5 billion, higher than any April-July period on record.

Total government debt at the end of July was 100.5% of GDP, the first time it has been above 100% since 1960/61. In cash terms, debt has now exceeded £2 trillion for the first time ever.

A shift to ‘inactivity’

The pandemic has not yet had an impact on unemployment statistics, although it has clearly affected the labour market.

As the chart below shows, between January to March and April to June employment decreased, and economic inactivity increased.

This means that not only are more people out of work, but more of them are not actively looking for work or are unavailable to start a job within the next two weeks.

This could be because fewer jobs are available, or because they are choosing not to look for work – for example, they may be a student, or too ill to work.

Millions of employees are still furloughed

One of the reasons we have not seen an increase in unemployment is due to the Job Retention Scheme.

According to the latest ONS Business Impact of Coronavirus survey, 12% of employees were furloughed between 27 July and 9 August, suggesting that millions of employees are currently still having part of their wages paid through the scheme.

From August onwards the level of the grant will be reduced each month, and the scheme is due to end on 31 October 2020. It remains to be seen how many furloughed employees will return to a job.

As a result, a rise in unemployment is expected to happen by the end of the year. The latest Treasury survey of independent forecasts suggests an average unemployment rate of 8.3% for October to December 2020. The unemployment rate was 3.9% from April to June.

Eat Out to Help Out

Throughout August the Eat Out to Help Out Scheme is running to protect jobs in the hospitability sector, alongside the temporary VAT cut to 5%.

As of 16 August, 85,000 individual restaurants had registered for the scheme, with a total of 35 million meals subsidised at a total cost of £180 million.

Press reports were positive about take up of the scheme by customers during the first week. However, some in the industry reported concerns the scheme had simply shifted dining patterns to earlier in the week. Businesses also reported concerns about maintaining demand once the scheme comes to an end on August 31.

Some sectors are showing a recovery

Overall, retail continued to recover in July. Sales increased by 3.6% compared to June, and were higher than their pre-coronavirus levels in February, as well as being higher than in July 2019.

The manufacturing and services sectors continued to show recovery. The Purchasing Managers Indexes for both sectors show growth with increased consumer spending and a boost to hotels and restaurants from the Eat Out to Help Out Scheme. However, the commentary published with the Indexes raised concerns about the sustainability of recovery, as businesses are cutting costs and employment is falling.

The ONS suggests that the opening of restaurants is a potential reason why food store sales contracted in July 2020, compared to the previous month. Monthly sales in food stores fell by 3.1% in July, although they remained at a higher level than before the pandemic.