Slow initial recovery and scale of government support suggest difficult time ahead for economy.
The economic data emerging in the second quarter has backed up some of the drastic forecasts made during the early stages of the Coronavirus pandemic. GDP in April was 25% lower than a year earlier – back to its 2002 level. The latest GDP estimate for May showed a month-on-month increase of 1.8% as restrictions were starting to be eased. This is a slower recovery than many economists and forecasters expected, casting doubt on the possibility of a ‘V-shaped’ recovery.
Senior Bank of England figures have disagreed over the strength of the recovery, with chief economist Andy Haldane more positive that the economy will recover quickly and the only member of the Monetary Policy Committee to not vote for increased bond purchases at their 18th June meeting.
The Office for Budget Responsibility updated its analysis in the July Fiscal Sustainability Report, setting out ‘central’, ‘upside’ and ‘downside’ scenarios for many key economic indicators. In all three they expect the peak-to-trough GDP fall from Q4 2019 to Q2 2020 to be 23%, with no further falls but varying strengths of recovery. The central scenario sees output regain its pre-virus peak at the end of 2022, with some economic scarring over a five-year horizon.
The table below shows a selection of the key data from the OBR scenarios. Even the upside scenario sets out a slower recovery than the central one published in April, suggesting the pandemic has had a significantly worse impact than originally expected.
Figure 1 shows a selection of GDP forecasts from the last three monthly editions of the HM Treasury forecast comparison report. Overall, the consensus is pointing towards a GDP fall for this year of around 9%, followed by a recovery in the region of 6-7% growth in 2021.
The economic impact of the pandemic so far is best shown by the scale of changes to employment. The government’s Coronavirus Job Retention Scheme has supported employment significantly, with a total of 9.4 million jobs furloughed at a cost of almost £30bn up to 12th July, as shown in Figure 2.
The official measure of unemployment is broadly static at 3.9%, with the amount of furloughing potentially masking the true picture. Other measures of employment reflect the reduced activity much more clearly. The ONS measure of hours worked saw a huge fall in the three months to May, 17% lower than the same period last year, as shown in Figure 3.
The number of paid employees was 2% lower in June compared to the same month last year. Data on pay has been volatile through the crisis – median pay growth had been quite strong at around 4% annual at the start of the year, but went negative in April and May before bouncing back slightly in June.
The Bank of England Q2 2020 Credit Conditions Survey reported the availability of mortgage finance (purchase and remortgage) decreased significantly and was expected to decrease further in Q3. By contrast, corporate credit availability was improved, underpinned by government support schemes. Demand for residential mortgages fell in Q2 but the survey respondents did expect it to pick up in Q3.
The chart below shows a selection of results from the survey. As expected in last quarter’s commentary, lenders have focussed on borrowers with higher deposits and have increased margins, not passing on the base rate cut.