Faster rebound; slower recovery

Extract from Redwood Financial’s Economic Review August 2020

As recent economic statistics confirm the UK officially entered recession, Bank of England (BoE) forecasts suggest the slump will be less severe than previously thought, but the ensuing recovery is likely to take longer.

Data released by the Office for National Statistics (ONS) showed the economy shrank by 20.4% between April and June compared with the first three months of the year. This was the UK’s largest ever quarterly contraction and pushed the economy into its first technical recession – defined as two successive quarters of negative growth – since the 2009 financial crisis.

While the data was undoubtedly grim, it did show the economy’s low point was reached in April when output was over 25% below its pre-pandemic level. It also showed that, as lockdown restrictions eased, the economy bounced back, expanding by 8.7% in June following growth of 1.8% in May.

Survey evidence also suggests this improvement has continued, with the IHS Markit/CIPS flash composite Purchasing Managers’ Index rising to a near seven-year high of 60.3 in August, up from 57.0 in July. However, while this does indicate accelerated growth, it does not signal a return to normal levels of output.

The BoE’s latest economic forecasts released in early August, reinforce this point. Although the Bank said that a faster easing of lockdown restrictions and a more rapid pick-up in consumer spending has helped the economy rebound faster than previously envisaged, it also warned that a slower paced recovery now appears likely.

Specifically, the new BoE forecasts suggest the UK economy will shrink by 9.5% this year, compared to a previously estimated contraction of 14%. The annual growth rate in 2021 has been reduced to 9% from a previous estimate of 15%, which would mean the economy only regaining its pre-virus size at the end of 2021.

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