Realistic or reckless?

England is merely a week away from the ‘freedom Day’. The government’s anticipated rubberstamp comes on the back of substantially weakening the link between Covid infections and deaths as two-thirds of UK’s adult population has been fully vaccinated. Yet worries remain as cases have now risen above autumn’20 levels.

We’ll soon see the effects of different approaches as the devolved nations are taking a more cautious approach towards lifting Covid curbs. Step 4. Last week the Prime Minister announced the plan for removing most Covid restrictions in England from July 19th. Social distancing and mask wearing will no longer be enshrined in law and you’ll be able to have as many people at gatherings as you like. It’s a big change but this new normal is going to feel very different across the economy.

Businesses will set their own rules, which may continue to mean mask-wearing in some circumstances, especially likely on crowded transport. It also signals the point at which the main constraint on economic activity ceases to be the regulations and instead becomes peoples’ own confidence in engaging with the economy.

Amidst rapidly rising Covid cases and with self-isolation for a positive test still enforced, that shouldn’t be underestimated.

Normal may be a little way off yet. Still spectacular. UK GDP grew for the fourth consecutive month in May 2021, though at a weaker than expected pace (0.8% month-on-month increase vs. consensus at 1.5%). Restaurants led the way thanks to the second stage of reopening in mid-May. The economy is now c. 3% below pre-Covid peak and majority of the sectors have either returned or close to their pre pandemic levels. However, the pace of recovery is slowing down, both for production and construction sector. Supply side shortages are partially responsible for this.

June is likely to see further deceleration. Fast moving data on spending indicates rising consumer caution with cases on the rise. And of course, the last mile is always the hardest!

K-Shaped. With large parts of the economy already open, growth imbalances are surfacing more than ever. While spending picked up somewhat in the last week of June, there are pockets of weakness.

Overall CHAPS spending data raised 3% w/w, but households shied away from social spending. Restaurant reservations continued to be on a downward trend, though still 19% above its 2019 levels.

But, UK’s labour market has continues to shine. Share of workers on furlough down to 5% and online job adverts are now 35% above its Feb’20 levels. Further, mobility indicators have continued to improve, particular beneficiary of May reopening has been aviation sector, daily flights usage up by 33% since the green list of countries was announced .

Good start. Is COVID helping or hindering the UK’s longstanding productivity challenges? The jury may still be out, but the latest evidence is encouraging: output per hour worked rose 0.9% in Q1 compared to the same quarter last year. This gauge of labour productivity is now 0.5ppt above pre-COVID levels, boosted by a shift towards more productive industries (e.g. manufacturing) and ways of working (e.g. online sales). Though new product & service offerings and making changes to how they operate, businesses are making more effective use of inputs too, pushing-up multi-factor productivity by 0.4% to within a hair’s breadth of 2019 levels.

Solid month. The housing market has seen exceptional growth through the worst period in the century, breaking records of price growth and transactions in previous months. The caution for a tentative cool down, if not a disruptive correction, naturally follows. The stamp duty support is also witnessing a tapered withdrawal, after all. Yet the headline house price inflation steadily moves onward. Demand and sales metrics from the June RICS Residential survey continue to remain positive, albeit more modestly than before. A prominent indicator though is moving in the red – new instructions are getting scarcer, third month in a row. Coming months house the future of the market.

Top models. In June, new car sales rose by 28% in comparison to the same month of 2020. The growth comes as a result of less stringent corona virus restrictions on dealerships. Although the market is recovering, growth has been stunted by the continuing shortage of semiconductor chips, leading to longer wait times for buyers. Despite this, the Tesla Model 3 topped the charts closely followed by the VW Golf. And in case you detect a pattern, indeed alternatively-fuelled cars continued to take the headlines for sales increases with plug-in hybrid car sales increasing by 146% and pure-electric car registrations higher by 123%.

Getting there. In May, as the Euro zone economies reopened, the retail sales increased by 4.6% m/m, slightly beating expectations of 4.4% rise. The sales were up 9% compared to previous year. Sales of food drink and tobacco items declined by 0.2% as people got opportunity to dine outside.

On the other hand, sales of motor fuel were higher by 8.1% and sales of non-fuel, non-food items increased by 8.8%. Amongst the bigger economies, sales improved healthily both in Germany (4.2%) and France (9.9%). Divided. The minutes of the latest Federal Reserve Open Market Committee (FOMC) in June 2021 revealed little consensus over the timing of an unwinding of the Fed’s balance sheet.

Some Fed members warned that the recent rise in US inflation could be more “persistent than expected”. Others, however, stressed that uncertainty about the US economic outlook is “elevated”, so it was too early to draw conclusions. The next staging post for the Fed will be the annual policy forum in Jackson Hole in late August 2021. A hawkish outcome would set the stage for an early Fed announcement of tapering, possibly as early as September 2021.

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