UK musters sluggish rebound in May

The economy rebounded less than expected in May as the coronavirus lockdown eased, official figures have shown.

UK GDP added 1.8pc, according to the Office for National Statistics (ONS), well below the 5.5pc uptick economists had forecast. This chart shows the miniscule V-shaped recovery:

It came after a record 20.4pc fall in April and a 5.8pc slide in March. Over the three months, GDP contracted by 19.1pc. That left the economy still more than a quarter smaller than its January peak, before the pandemic fully took hold.

Why so lacklustre?

Gross domestic product measures the value of goods and services produced in the UK. It estimates the size of the economy and its growth rate.

In normal times, a 1.8pc monthly increase would be welcome news but in the current context, the word on all economists’ lips was “disappointing”.

The figures were never going to dazzle given that unlike some other European countries, including Germany and France, the majority of lockdown measures remained in place in May.

The strongest recoveries were in manufacturing and construction, partly due to the Government's recommendation on May 13 that employees in those sectors should return to their usual place of work.

But even those sectors’ output was 21.6pc and 39.9pc below their respective January levels, as this chart shows:

The distribution sector was one bright spot, with output jumping 13pc month-on-month due to a boom in online sales.

There was also a pick-up in net trade in goods. Export volumes rose 1.1pc in May while import volumes lost 1.5pc compared to the month before, leaving a trade surplus of £7m, from a deficit of £1m in April.

Notably, though, trade in services was still depressed, down 46pc from January to May, compared to 27pc for goods.

Will it improve in June?

A sharper increase in GDP is expected in June, when the lockdown restrictions that covered much of the services sector were loosened more significantly.

Based on unconventional indicators such as energy consumption, transport usage and mobility data, Samuel Tombs, of Pantheon Macroeconomics, sees an 8pc monthly increase.

However, he notes that output in the education sector is unlikely to return to pre-pandemic levels until schools fully reopen in September.

Similarly, with hospitals continuing to cancel elective procedures to deal with Covid-19 cases and people avoiding A&E, a recovery in the healthcare sector is likely to take a long time. Together education and healthcare account for 13pc of the economy.

“With surveys showing that households remain very fearful of contracting the virus, social distancing rules likely to limit the consumption of services until the population is vaccinated, and employers set to layoff many furloughed workers in the autumn, we think that GDP still will be about 5pc below its pre-Covid level by the end of this year,” Tombs adds.

James Smith, of ING, expects that some pent-up demand was unleashed on retail in June, as Google data show trips to retail and recreation spots partly recovered in England, outside the major cities. This is important given the UK economy is consumer driven.

Smith warns, though, that “with overall footfall numbers still well down on last year, we should be cautious in assuming that any rebound in retail activity will prove to be fully sustainable”.

Investec expects the economy to “almost certainly have imploded over the second quarter as a whole” leaving it where it was in mid-2003.

Thomas Pugh of Capital Economics likewise cautions that “there is a real risk that the nascent recovery will peter out in the second half of this year as unemployment rises and government support fades”.

Separately, the Office for Budget Responsibility, the spending watchdog, said the economy might not recover from the coronavirus crisis until 2024, predicting that GDP will fall by as much as 14.3pc this year.

The problems of measuring GDP

Even before the pandemic, measuring the UK’s economic output was difficult, as this video explains:

In a radically transformed economy, bigger and more frequent revisions of the data point to the difficulty in collecting it, hence there has been greater emphasis among economists on alternative measures of growth.

Philip Shaw of Investec says: “It’s a difficult environment for statisticians to operate in. The problem is you don’t know what the underlying picture is.

“For policymakers, the main challenge isn’t so much working out whether the reduction in GDP this year will be 8pc or 12pc. It’s about identifying turning points, which is where Google mobility data, retail footfall figures and electricity demand give quite a good direction.”