Chief Economist’s Weekly Briefing – A bumpy ride

The UK economy proved its resilience yet again. June GDP figure surprised on the upside despite disruptions caused by the third wave. Granted, there’s still some way to track back and July looks to have been more of a struggle. But the UK is well placed to chase down the pre-Covid level of economic output in the coming months.

Solid progress. UK GDP rose at a steady pace in June, even with rising cases as the month progressed and remaining some way short of full reopening. Output rose 1% from May, slightly better than expectations, leaving the economy 2.2% below its pre-pandemic level. However, the recovery is far from even. Health and hospitality sector led much of the gains while some consumer-facing services have substantial ground to claw back. Supply side constraints continued to bite, including construction. The recovery is likely to enter a slower phase as the gap to the pre-pandemic level is fast closing.

Rebound. With a solid 4.8% pace of growth in second quarter GDP growth, very close to the Bank of England estimate of 5%, the reopening in the UK has clearly been successful, aided by the stellar vaccination program. All the main components of expenditure saw growth apart from services trade, with the largest contribution from household spending. Business investment grew by 2.4% in Q2, led by continuing evidence of the digital transition. Among its peers, UK rose the fastest in Q2 yet the gap to pre-pandemic level remained higher compared to other G7 countries.

Turning a corner. Fears of a third wave alongside the ‘ping-demic’ looks to have put the brakes on the recovery during July. However, some poise was regained in the first week of August. CHAPS card spending increased by 4%, including a rise in social spend, which is now at its highest since Mar-2020. Retail footfall also improved and now stands at 80% of the equivalent week in 2019, with high street footfall increasing by 3%. Meanwhile the weekly flight total surpassed 3k, still less than half of where it was in 2019 but the highest since March ‘20. The share of businesses trading remained flat at their end-June level (89%), while job adverts remained around 30% above pre-Covid levels.

Churning. Covid has cast us adrift in a sea of change and flux. This is especially true when it comes to businesses. Take firm closures, which rose locally by 91% in Q2 2021 compared with Q2 2020 (UK = +43%). This sounds bad. After all it is the highest number of quarterly closures since 2017. Yet Q2 2020 was artificially low and the other side of the see-saw, firm creations in NI, rose as well, by 55% (UK = +28). It’s hard to pinpoint exactly what’s driving the flow. But potentially firm churn and capitalism’s ‘creative destruction’ can get the economy pumping again.

Tempting. The relaxation of some covid restrictions tempted more people back to the High Street in July, according to the British Retail Consortium. With greater opportunity to eat and drink came a 6% boost to sales in-store. Clothing sales fared particularly well as socialising increased, but purchases of home office equipment weakened with more workers starting to return to offices.

Trading up or down? UK goods exports to the EU rose by 1.2% m/m in June but these were more than offset by a 5.6% m/m decline to non-EU countries. Meanwhile the UK imported more goods from both regions – driven by a pick-up in the new car market – with total imports up 2.6% m/m. The various Brexit milestones coupled with the coronavirus pandemic have created higher levels of volatility over the last two years. Interpreting trends from trade statistics has been difficult. 2018 is the most stable period to compare 2021 data. Looking at Q2 2021 trade data, total exports of UK goods were down 4.4% and imports down 2% relative to Q2 2018. The trade recovery remains a work in progress.

Under occupation. 2020 was an annus horriblis for the hospitality  sector with hotel occupancy averaging 0% for four months. Lockdown restrictions meant the first four months of this year saw the same big fat zero recorded. But since May 2021 a corner has been turned for Northern Ireland’s 144 hotels. An easing of lockdown restrictions saw room occupancy rates rise to 53% in May and 57% in June. While these are well down on the rates posted in May (73%) and June (82%) 2019, it is a massive step in the right direction.

Fast rising. Consumer prices in the US rose 5.4% in July as the pent-up demand for travel and restaurants kept price levels elevated in some areas when compared to last year. On a monthly basis prices rose 0.5%. However, core inflation, which strips out food and energy, rose by a mere 0.3%, shy of a forecasted 0.4% and well below June’s rise of 0.9%. This could be indicative of a fading of some of the transitory push toprices linked to reopening. For instance, car rental prices fell by 4.6%, airfares came off and used vehicle prices rose by only 0.2%, sectors which have driven the rise in the previous months. While central banks across the world will find some comfort in the receding pace, it is still early days.

Extremities. The Intergovernmental Panel on Climate Change (IPCC) published part one of its updated analysis, looking at the physical science basis of climate change. 234 authors from over 60 countries, 3k pages and 14k cited references. Comprehensive is an understatement. And it includes an assessment of when we’re likely to hit 1.5C warming (the limit to which G7 nations have pledged). In most scenarios it will be the 2030s. But get emissions falling now, achieve net zero in the 2050s and we’ll fall back below it later in the century. Another key conclusion is that emissions have “led to an increased frequency and/or intensity of some weather.” That makes adaptation key. A detailed look at that will be set out in the next instalment in the trilogy of reports.

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