July 2020 Macroeconomic Update

HEADLINERS: July's economic developments

  • UK unemployment rate: Small decrease in May despite a fall in employment and the number of vacancies dropping
  • Inflation rate: CPI and PPI both continued to fall well below target, with CPI reaching 0.6% and PPI -1.4% in May 2020
  • Exchange rates: GBP stabilising at 1.10 EUR and 1.25 USD by end-June after depreciating against both in March 2020
  • UK and US stock indices: Rapid recoveries since reaching a trough in March 2020
  • Oil prices: Recovery in price underway, in line with a general trend of lockdowns being eased worldwide and the corresponding increase in production
  • Purchasing Managers’ Indices (PMIs): Sharp recovery in the 3 main PMIs since reaching a trough in March 2020
  • Consumer Confidence Index: Slight recovery in Consumer Confidence Index in June 2020 since Covid-19 related trough

Summary

After falling nearly 26% between February and April, GDP rose by 1.8% month on month in May as the lockdown restrictions began to be relaxed. While the manufacturing, construction and distribution sectors saw a marked pick-up in activity, most sectors reported that output remained close to the April trough, reflecting the fact that most remained subject to lockdown restrictions and that the ongoing closure of many schools prevented large numbers of parents from working. Factoring in the revisions to prior months, we now expect GDP to fall by almost 22% in Q2 as a whole. However, we expect to see a strong rebound in activity in Q3 following a more meaningful relaxation of restrictions in June and July with GDP set to rise by nearly 15%. However, the expected Q3 rise in GDP will not suffice in making up for the falls in GDP over the previous quarters.

The Chancellor’s Summer Economic Update unveiled a further stimulus package that was largely aimed at supporting employment and the hospitality sector. The package included up to £30bn worth of stimulus measures, alongside another £33bn of funding for public services to fight the pandemic. However, there are major question marks over the efficacy of some of the measures and it is hard to see the package having a material impact on the growth outlook. In particular, we think it unlikely that the £1,000 job subsidy will be decisive in many employment decisions as the furlough scheme draws to a close. Similarly, the temporary VAT cut for the hospitality sector is unlikely to be particularly effective given the factor holding back many potential customers is not price but fear of the virus.

Unemployment

Figure 1: The UK unemployment rate had stabilised despite the number of vacancies dropping

Source: ONS

Despite a fall in employment and a large fall in vacancies, unemployment rate decreased slightly from 3.8% in April 2020 to 3.7% in May 2020. This was attributable to an increase in the number of people out of work but not actively looking for a job who will thus not be considered unemployed. The Government’s Job Retention Scheme continued to support 1.1 million employees while also helping to prevent any large spike in unemployment. As non-essential retail and many other businesses reopened post-lockdown, the outlook for employment has improved. However, the end to the Job Retention Scheme in end-October remains a potential trigger for a large spike in unemployment.

Inflation

Figure 2: Both the CPI and PPI fell due to a decrease in raw materials and energy costs

Source: ONS

The Consumer Price Inflation (CPI) had decreased from 0.8% in April 2020 to 0.6% in May 2020, driven by continued falling costs of fuel and energy. The price of Housing and Household Utility Services also fell, reducing CPI. The declining prices come despite the continued expansionary monetary policy by the Bank of England.

Likewise, the Producer Price Inflation (PPI) fell from -0.7% in April 2020 to -1.4% in May 2020 due to the 10.0% decrease in materials and energy costs, compared to 10.2% decrease in April 2020.

Meanwhile, ONS data shows a decrease in Vacancies to 333,000 in June 2020, the lowest level since the ONS vacancies time series began. Every sector fell in this quarter, with the largest decrease being from ‘food and accommodation services’, which saw a 91.1% decrease in vacancies. This strongly suggests further damage to employment in the future and is not a good indicator of inflationary pressure due to the expected lower consumer spend going forward.

Exchange rate

Figure 3: GBP partially recovers from depreciation against USD and EUR in March

Source: Bank of England

Following a sudden depreciation of GBP relative to both USD and EUR in March, GBP has stabilised at approximately 1.10 EUR and 1.25 USD. The first half of June has also seen a depreciation of USD, relative to GBP, attributable to the fears of a second wave in the USA.

The exchange rates have yet to reach its pre-Covid 19 level against either USD or EUR, reflecting overall investor risk and concern over the UK recovery from Covid-19 and uncertainty over Brexit.

UK and US stock markets

Figure 4: Stock indices continued recovery in June despite fears of second wave in USA

Index 01 Jan 2017 = 100
 Source: uk.investing.com

A rapid increase in the US and UK stock market indices continued, albeit with a fall of 100 index points for S&P 500 amid fears of a second Covid-19 wave in the US. Expansionary monetary conditions, including unprecedented purchases of corporate bonds by the Bank of England and other Central Banks, may have caused further divergence between stock market performance and economic fundamentals.

Global oil price

Figure 5: Oil price begins to rally after historic crash from February to May 2020

Source: Macrotrends

Since May, the oil price has begun to rise significantly from a low of $11 per barrel on 21 April 2020 to reach $39 per barrel on 30 June 2020, reflecting rising production and increased business activities/expectations amid a general trend of lockdowns being eased globally. However, the oil price remains considerably below the pre-Covid-19 level. This reflects both greatly diminished demand due to the Coronavirus crisis and associated economic concerns, but also continued increased supply due to the continued breakdown of the OPEC+ cartel agreement between major oil-producing nations. In particular, the oil supply from Saudi Arabia and Russia remains high.

This tension can be projected to trigger an increase in global output over the coming months, with lower input prices reducing the costs of production for firms. However, the expected lower oil prices could also add to deflationary pressure.

Purchasing Managers’ Indices (PMIs)

Figure 6: Sharp recovery in PMIs since March

Index above 50 indicates growth
Source: CIPS/Markit and Trading Economics

All 3 PMIs recovered sharply in May, with Construction rising the most by 26.4 to reach 55.3 which is above the pre-Covid-19 level. This uplift was primarily driven by the re-opening of construction sites in May 2020 which has increased construction activities. A further uptick is expected going forward, especially for the Residential sector which has been boosted by the Chancellor’s recent announcements of Stamp Duty holiday until 31 March 2021.  

Meanwhile, Manufacturing PMI rose by 7.3 to reach 48.0 in June 20, erasing two highly negative months in March and April 2020 due to the re-opening of factories, loosening of lockdown measures and employees returning to work.

Services PMI has also partially recovered from lows of 12.3 in April and 29.0 in May to reach 47.1 in June. Whilst still below the level pre-crisis, this shows the UK’s largest sector recovering as the lockdown restrictions eased and restaurants, bars and shops started re-opening.

Consumer Confidence Index

Figure 7: Slight recovery in Consumer Confidence Index in June 2020 since Covid-19 related trough

* Score over 100 for the YouGov/CEBR Consumer Confidence Index means more consumers are confident than unconfident
Source: YouGov/GfK

YouGov/CEBR Consumer Confidence Index 2020 climbed back up to 95.8 in June 2020. This shows some recovery in consumer confidence but negative attitude still outweighing consumer confidence.

GfK Consumer Confidence Index also increased after plateauing at a 10-year low of -34 between March and May 2020 to reach -30 in June 2020. Although a significant rise, this again still leaves confidence at much lower levels than at any point during the 2016 Referendum campaign or Brexit negotiations.

The turning point in consumer confidence is likely a mix between reductions in the prevalence of the virus in the UK and the beginnings of related lockdown measures being lifted. If the prevalence of the virus continues to fall, a sharper decrease in the negative confidence of both consumers and firms can be expected.

This post was co-authored by Matthew Oulton, Committee Member of the Young Fabian Economy and Finance (YFEF) Network, Chris Wongsosaputro, Chief Macroeconomist of the YFEF Network and Amarvir Singh-Bal, The Secretary of the YFEF Network and lead of the Economic Update Team.

If you want to be involved in the next edition, to please reach out to us via e-mail address economynetwork@youngfabians.org.uk

 

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