Chief Economist's note: Data from the bottom of the lockdown
Data from the bottom of the lockdown
Yael Selfin, Chief Economist in the UK discusses the latest data on the UK economy and what it means for the months ahead.
- Inflation well below target gives room for BoE to act.
- Sharp fall in output at the height of the lockdown could mark the bottom of the crisis.
- Minimal change in April unemployment numbers imply worse is yet to come.
Data released this morning show no rise in overall prices in May, thanks to lower cost of fuel, travel and medical products and equipment. This leaves inflation at only 0.5 percent, well below the Bank of England’s 2 percent target.
Bank of England's MPC decision, which is due 18 June 2020, is expected to include some bolstering of its quantitative easing (QE) programme, as it attempts to provide additional support for the economy. More controversial measures, such as a move to negative interest rates, are likely to remain on hold for now.
Meanwhile, data published last week showed that the UK is in the midst of what is probably the deepest recession in modern history. The economy contracted by over 20 percent in April, following a fall of 5 percent in March.
The fall in output was so widespread that almost no sector escaped a contraction in April: only pharmaceutical manufacturing grew, by 5 percent. Even the healthcare sector, where we expect to see an increase in demand this year, saw output fall by 29 percent. Given that hospitals were preparing to face the peak of the pandemic by postponing non-COVID related treatments, there may be big changes in data later this year. Overall, output in services and manufacturing fell by 19 percent and 24 percent respectively, including a fall of over 90% in automotive manufacturing, where factory closures halted production. We expect to see signs of recovery in most sectors as the government eased lockdown from May.
Chart: UK monthly GVA growth, April 2020
More concerning is the data on hospitality businesses: bars and restaurants saw an 88 percent output drop in April, suggesting that the shift to takeaway and delivery didn't compensate for the closure of dining facilities. With reopening delayed until July and some form of social distancing restrictions likely to stay in place until the pandemic is over, this sector will take longer to recover.
The labour market is showing signs of strain
So far, the headline unemployment rate has stayed at pre-COVID levels: April data shows minimal changes from the month before. However, in all other regards, labour market indicators are under strain. Since March, we have seen a 125 percent increase in the number of people claiming unemployment benefits and the average number of hours worked fell by more than 20 percent.
Workers have benefitted from a range of generous government support schemes, however as these start to unwind, more workers could be made redundant over the coming months. We may then start to see a significant increase in the headline rate of unemployment by the end of the year and it may take years for the job market to recover fully.
Uncertainties over a second wave
A new cluster of coronavirus outbreaks in Beijing's largest fresh seafood and vegetable market heightened concerns over the risk of a second wave in China. After more than 50 days without a new case, life in Beijing had almost returned to normal. Schools and cinemas were scheduled to reopen, but the outbreak thwarted the plan and some parts of the city went back into partial lockdown.
In the US, some of the states that are reopening faster than others, such as Arizona, Florida and Texas, also saw increases in new cases last week. These upsurges highlight the uncertainties around the path and timing of economic recovery.
A vaccine in time for Christmas?
There may be some cause for optimism, with a vaccine potentially ready as early as September this year. In an interview on 13 June, Sir John Bell, Regius Professor of Medicine who leads the Oxford vaccine development team, rebuffed sceptics of his ambitious timeline to start the vaccination programme in late September and reaffirmed he expects to have the entire British population vaccinated by Christmas. If manufacturers take some risk, getting production ready ahead of regulatory approval, then that would dramatically speed up the vaccination process.
Given the vaccine in the pipeline is relatively cheap to manufacture, this has helped convince manufacturers to move ahead. Although there is a possibility that the result of the clinical trial may not support the effectiveness of the Oxford vaccine, Professor Bell expects it to have a higher-than-average chance of success. This is because there has already been a lot of testing and evaluation of its methodology for stimulating the immune response prior to the COVID-19 programme; early data suggests that it has a good chance of getting across the finishing line.
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