UK Economy: Hurtling towards the abyss?

 

UK’s recession is official. The economy contracted by a huge 20.4% qoq in the April-June quarter, after shrinking by 2.2% in the January-March quarter. The latest dramatic decline was expected, as the lockdown during much of the quarter brought economic activity to a grinding halt. 

Even if the lockdown is accounted for, however, the UK economy has suffered a far more severe blow compared to other economies as per the Office of National Statistics. UK's GDP, for instance, declined far more than the US economy (see Chart below). 

With the relatively sharper contraction and recession in place, is the UK economy hurtling towards the abyss? In other words, is the recession severe enough to degenerate further into an actual depression?

How likely is a depression?

In so far as a depression is defined as a prolonged recession, at least in the near future it appears highly unlikely. There are 3 reasons for this:

#1. Bounceback in June: Consider the standalone data for June GDP, which showed 8.7% mom growth. This is higher than the expected growth of 8%. This clearly indicates that at the lockdown eased, activity returned at a fairly fast clip. By pure extrapolation, this in turn implies that economic health will look even better in the succeeding months, as the lockdown continues to be pulled back.

#2. Corroboration with other economic indicators: Further, other indicators support recovery. Retail sales, for instance, increased by 13.9% mom in June as per official government data. Retail sales’ volumes are in fact, back to pre-coronavirus levels (see Chart below). According to research by the British Retail Consortium and KPMG, the recovery continues in July as well. The manufacturing PMI in July is also robust, with levels higher in over a year. Similarly, the services PM was strong too, showing the fastest expansion since 2015. These numbers bode well for the economy. 

#3. Limited setbacks: There’s little reason to doubt the continuation of the trend. As of mid-August, the economy continues to open up post-lockdown. Some pockets continue to face the heat, because of fresh quarantines for countries like Spain and France. But the impact of these measures is likely to be less severe because they are geographically and sectorally limited. 

As a result, the recession, at least for now, will be a contained one. Q3, 2020 will show economic expansion, all else equal, bringing an end to the recession. In fact, by this logic, the recession has already passed. That doesn’t however mean that the economy is back on track. 

An uncertain future

Q4, 2020 will be hit by the withdrawal of the government’s furlough scheme. UK’s employment rates, which so far, have remained high, can be impacted by this. Even though the headline figures on the labour market still look healthy (see Chart below), numbers like redundancies and earnings growth do reflect labour market weakness. 

However, if the economy has already improved in Q3 and the fact that the withdrawal happens only one month into Q4, means that the blow may be softened. 

Even if effects of Covid-19 can be put behind us, though, the world was in an uncertain place even before this. In the UK, the Brexit negotiations were still ongoing. The US-China trade war has only intensified in the recent months. As the US, the largest economy goes into elections in Q4, 2020, more uncertainty is possible. Further, global growth slowdown will impact on trade and investments for the foreseeable future. In essence, it will likely be a return to slow growth after riding out of the present recession.