The economy may be showing signs of life but the real pain is yet to come

Indications of a bounce are weak and large-scale job cuts, along with continued fears about coronavirus will cause serious problems over the coming months, writes Ben Chapman

Thursday 06 August 2020 12:09 BST
Beneath the headline figures on some economic indicators lies a bleak reality
Beneath the headline figures on some economic indicators lies a bleak reality (REUTERS)

After taking an enormous hit from coronavirus and the lockdown, UK economic activity is thankfully showing tentative signs of a rebound.

New car sales rose 11 per cent in July compared to last year while a survey of services industry managers jumped back into positive territory. The amount of energy we use and the number of journeys we are making suggest we are heading somewhere back towards normality. Perhaps most encouragingly, payments data shows consumer spending was only about 10 per cent down in July on its level of last year.

Signs like these have prompted the Bank of England to revise up its estimate for the UK economy, from a gargantuan 14 per cent fall in GDP this year, to a merely huge 9.5 per cent.

The Bank then suggests that there will be a bounce next year which will take output back to pre-pandemic levels by the end of 2021, but it warned that things were "unusually uncertain" with risks "skewed to the downside".

In English, this means "we don't know what's going to happen and it may well be worse than we've said".

Some of the more up-to-date indicators we have do not necessarily suggest anything approaching a "V-shaped" recovery. Car registrations may be up for July but the rise was barely enough to make a dent in the huge numbers of sales lost so far this year.

Dealers sold 175,000 new cars during the month, according to the Society of Motor Manufacturers and Traders (SMMT).

Given that the month was the first where all showrooms were free to open since March, you might expect a large amount of pent up demand to show itself.

A fairly modest 11 per cent rise will not do much to rescue one of many industries in crisis.

Over the year so far, sales are 40 per cent down and UK car production has dropped to its lowest level since 1954 - the year post-war rationing ended.

Around 13,000 job losses have already been announced in the industry. Unless sales rise quickly and significantly, thousands more could follow over the coming months.

A much broader indicator of where the economy is heading comes from the purchasing managers' index (PMI), which surveys hundreds of companies on their orders and optimism about the future.

It gave an encouraging reading of 57 on Wednesday, prompting headlines that UK businesses were growing at their “fastest rate for five years”.

This is misleading as the number only indicates companies' perceptions of growth from the month before, which was a pretty terrible month.

The PMI shouldn't be taken as a direct indicator of economic growth, as Samuel Tombs, chief UK economist at Pantheon explains: “In practice, some firms simply respond to [the] survey by giving their vague sense of whether output is above or below recent norms.

“Attempting to infer month-to-month changes in GDP from the PMI at present, therefore, is a fool’s errand.”

However, there are a number of other indicators such as increased energy use and travel, which suggest a significant pick-up in activity. Pantheon estimates GDP grew around 8 per cent in both June and July but, given the precipitous fall before that, output will still be a hefty 12 per cent below where it was before Covid by the end of the year - much more pessimistic than the Bank of England.

There are clearly tougher times ahead as the economic damage caused by the pandemic begins to really hit home. Job losses are starting to mount, with WH Smith, Dixons Carphone and Pizza Express among the latest big names to get rid of staff.

The latest surveys indicate that firms plan to get rid of many more staff in the coming months, perhaps as many as in the 2008-9 recession (8.1 per cent). Again, that would be worse than the Bank of England's prediction.

Given that the Bank of England expects 2.5 million people to be jobless by the end of the year, some analysts might see it as optimistic to think GDP will jump sharply next year back to where it was pre-Covid.

Much higher joblessness will drastically reduce spending as the government ends the furlough scheme in October. There are also reports that the government is looking squeezing public spending in the Autumn too. That would be a huge mistake in the circumstances.

Fears about the virus and the prospect of further local lockdowns will continue to make businesses and consumers cautious, unlikely to invest and more likely to save, meaning we truly could be in for a winter of discontent.

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