- GDP grew 1.8% month-on-month in May after April's record fall of 20.3%, causing the year-on-year decline to slow slightly to 24.0% from 25.3%. May’s GDP growth of 1.8% was below expectations of a rise around 5.5%
- The strongest month-on-month gain in May came in the construction sector (up 8.2%), following a 40.2% fall in April, as some sites re-opened. Industrial production climbed 6.0% with manufacturing output up 8.4% as some factories re-opened. However, services output only rose 0.9% month-on-month
- The three-month/three-month contraction in GDP widened to a record 19.1% in May from 10.8% in April
- The economy should have seen more significant improvement in June after an easing of lockdown restrictions, including the re-opening of non-essential retailers mid-month
- The EY ITEM Club had been expecting GDP to contract around 17% quarter-on-quarter in the second quarter, but a decline in the vicinity of 20% quarter-on-quarter now looks more likely following the lower than expected May rebound
- The EY ITEM Club expects the economy to return to clear growth in the third quarter with GDP expanding close to 10% quarter-on-quarter. The further easing of lockdown restrictions, including the relaxation of social distancing rules on 4 July and the partial re-opening of the hospitality sector, should help
- Overall for 2020, the EY ITEM Club’s recent Interim Forecast expected GDP to contract by 8.0%. Growth of 5.6% was forecast for 2021. The EY ITEM Club is likely to increase the expected fall in GDP in 2020 in its new Summer Forecast, which will be published later this month. Key downside risks for the forecast include a second coronavirus wave, persistent cautious business and consumer behaviour, the potential economic impact of COVID-19-linked job losses and business difficulties, and a ‘no deal’ outcome at the end of the Brexit transition period
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The UK economy came only modestly off its April lows in May, as there was an easing of lockdown restrictions during the month. From 11 May, people who could not work from home were told to consider travelling to work if their workplace was open, although using public transport was to be avoided if possible. Additionally, restrictions on the English housing market were relaxed in mid-May with properties being able to be viewed by prospective buyers as long as certain conditions were met.
“GDP rose 1.8% month-on-month in May after a record fall of 20.3% month-on-month in April (revised slightly from a previously reported decline of 20.4% month-on-month). Additionally, March’s decline in GDP was revised appreciably to 6.9% from 5.6%. All of April had seen the economy affected by the lockdown restrictions that were imposed on 23 March, while March had only been affected for eight days.
“May’s gain in GDP was well below expectations. The consensus was for a gain of 5.5% month-on-month with a wide range of forecasts from 2.9% to 11.0%. May’s GDP increase of 1.8% was less than the lowest expectation.
“The year-on-year decline in GDP narrowed to a still substantial 24.0% in May from 25.3% in April.
“Despite May’s 1.8% month-on-month increase in GDP, it was still down 19.1% in the three months to May, compared to the three months to February. It had been down 10.8% on a three-month/three-month basis in April.
“The strongest month-on-month gain in output in May came in the construction sector (up 8.2%), following a 40.1% drop in April, as some sites re-opened. House building saw particular improvement. The year-on-year fall in construction output narrowed to 39.7% in May from 44.2% in April. Nevertheless, construction output was still down 29.8% in the three months to May compared to the three months to February.
“Industrial production rose 6.0% month-on-month in May after a 20.2% drop in April. This was primarily due to manufacturing output increasing 8.4% in May, after a 24.4% decline in April, as some factories re-opened. Industrial production was down 20.0% year-on-year in May and down 18.5% on a three-month/three-month basis. Manufacturing output was down 22.8% year-on-year in May and down 18.0% on a three-month/three-month basis.”
“The most disappointing performance came from services where output only rose 0.9% month-on-month in May after a 18.9% decline in April when it was affected by many consumer-facing activities and education being shut down. The year-on-year drop in services output moderated to 23.6% in May from 24.2% in April. Services output was down 18.9% in the three months to May compared to the three months to February.
“The ONS observed “In the important services sector we saw some pickup in retail, which saw record online sales. However, with lockdown restrictions remaining in place, many other services remained in the doldrums, with a number of areas seeing further declines.””
Howard Archer continues: “The economy should have seen much more significant improvement in June compared to May as there was a progressive easing of lockdown restrictions, including the re-opening of non-essential retailers mid-month. Certainly, the June set of purchasing managers’ surveys for the services, manufacturing and construction sectors showed overall improvement. Additionally, the British Retail Consortium reported stronger retail sales in June.
“Nevertheless, it is clear that the contraction in GDP in the second quarter is now going to be greater than previously anticipated. The EY ITEM Club had been expecting GDP to contract around 17% quarter-on-quarter in the second quarter but a decline in the vicinity of 20% quarter-on-quarter now looks more likely following the economy’s performance in May.
“The EY ITEM Club expects the economy to return to clear growth in the third quarter with GDP expanding close to 10% quarter-on-quarter. The economy should benefit from the further easing of lockdown restrictions on 4 July when pubs, restaurants, hotels and hairdressers were allowed to open conditionally in England, along with a number of other leisure facilities and venues such as theme parks, cinemas, museums and galleries. Additionally, the social distancing rule was relaxed from two metres to ‘one metre plus’.
“The substantial fiscal and monetary stimulus that has been enacted should provide ongoing support to the economy. While some of the emergency fiscal measures will wind down over the coming months – such as the jobs retention scheme ending in October – the Chancellor announced further near-term stimulus measures in his Summer Statement on 8 July. Additionally, the Bank of England announced a further £100bn of asset purchases in June, which will take the stock up to £745bn. The EY ITEM Club suspects the Bank will announce a final £100bn in September or November. However, the EY ITEM Club does not expect the Bank to take interest rates below their current level of 0.10%, even though it has said it is actively reviewing the case for negative interest rates.
“There should also be some pent-up demand following the reduction in consumer spending in Q2 2020, while household purchasing power is being helped by very low inflation. Global economic activity is also now improving as other economies recover from the impact of coronavirus.
“However, many people will have lost their jobs despite the Government’s supportive measures and many incomes will have been affected, and this will have some limiting impact on consumption. Indeed, the strength and sustainability of the UK’s recovery will be influenced by how well the jobs market holds up.
“Meanwhile, many businesses have had a very difficult time and this may be likely to limit their willingness to invest or commit to major new projects for some time to come.
“Overall for 2020, the EY ITEM Club’s recent Interim Forecast expected GDP to contract by 8.0%. Growth of 5.6% was forecast for 2021. The EY ITEM Club is likely to increase the expected fall in GDP in 2020 in its new Summer Forecast, which will be published later this month.
Howard Archer adds: “A downside risk to the outlook is the possibility of a significant new coronavirus wave returning later in the year, requiring restrictions to be re-imposed. Another downside risk is that even with the relaxation of restrictions on activity, consumers and businesses may remain cautious in their behaviour for an extended period. The scale of the possible impact of job losses and business difficulties – despite Government support – is also unknown.
“The EY ITEM Club assumes that the UK and EU will avoid a “no deal” outcome at the end of 2020 when the Brexit transition arrangement is due to end. However, this is not certain and the possibility of trade between the UK and the EU reverting to WTO rules from next January is another risk to the 2021 outlook.”