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UK economic recovery gets off to disappointing start in May

Worries about UK prospects also drove demand for government bonds.
Image: Bloomberg

The UK economy’s expansion was much weaker than expected in May, casting doubt on how fast the nation can rebound from the depths of the coronavirus slump.

Disappointing figures for growth came as the country’s fiscal watchdog outlined the strain on government finances from the billions spent to help businesses and workers through the crisis. It said the budget deficit could balloon to 21% of output this year, and the debt ratio will stay above 100% for the next five years.

The news helped to push the pound lower against the dollar for a second day. Worries about UK prospects also drove demand for government bonds, driving two-year yields below Japan’s for the first time ever.

The data from the Office for National Statistics showed the economy expanded 1.8% in May. That fell well short of the 5.5% pace expected and leaves the economy almost 20% smaller over the latest three months. While activity has since picked up as lockdown restrictions eased, the UK, along with many other nations, remains a long way from approaching anything like a full recovery.

The figures will also likely temper some of the optimism expressed by Bank of England policy makers about the pace of the rebound being better than initially anticipated.

Hours after that release, the Office for Budget Responsibility said the economy will shrink as much as 14.3% this year, based on its pessimistic scenario.

Even its upside projection sees a slump of more than 10%, which would be the worst in three centuries. The budget deficit will expand to between 13% and 21% of GDP — reflecting increased spending and the drop in economic output — and net debt will stay above 100% for the next few years.

The OBR outlook is more gloomy than the latest Bloomberg survey, where the median estimate was for a drop of almost 9% this year. Few predict a rapid recovery, with output still likely to be lower at the end of next year than it was before the crisis struck.

What Bloomberg Economists’ Say

“The unexpectedly weak bounce in GDP for May shows a V-shaped recovery remains elusive. Output remained about 25% below its pre-virus peak even as restrictions were lifted. The economy is facing a slow road to recovery with social distancing measures still hampering many businesses and households nervous about spending.”

— Dan Hanson, senior UK economist.

With unemployment set to surge as government wage subsidies are withdrawn, Chancellor of the Exchequer Rishi Sunak last week announced a 30 billion-pound ($37.5 billion) stimulus package in an effort to revive confidence among consumers and businesses.

The government now has to return the country to a semblance of normality without triggering an economically devastating second wave of infections.

Garden centers reopened in May and some sporting activities were permitted, and estate agents began on-site viewings of properties. The economy received a further boost in June with the reopening of non-essential stores, while much of the hospitality industry resumed trading earlier this month.

© 2020 Bloomberg


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