Economists rule out ‘V-shaped’ recovery after weak survey data
Survey data today showed that the UK economy remained mired in a deep downturn in May despite an improvement from a dire April. Many economists have said that any hopes of a swift ‘V-shaped’ recovery from the coronavirus crash have all but faded.
At the beginning of the crisis, policymakers and analysts hoped that once coronavirus was brought under control, the UK economy would quickly rebound by the end of the year. On a graph, the economy’s performance would look like a V.
But purchasing managers’ index (PMI) survey data today showed the UK economy remained in dire straits in May after its worst month since the 1930s in April, even if conditions did ease a little. Employers are still slashing staff numbers, new orders have all but dried up and confidence has plunged.
Economists said the greater-then-expected level of infections and social distancing measures have put paid to a V-shaped recovery. However, some said they saw a flicker of hope as the country eases lockdown restrictions.
Social distancing to hurt companies
The UK’s high level of coronavirus infections is one factor that will hold back an economic rebound, said Chris Williamson, chief business economist at data firm IHS Markit, which released the PMI data. The UK now has the second-highest death toll in the world, with 36,000.
“The UK looks set to see a frustratingly slow recovery, given the likely slower pace of opening up the economy relative to other countries which have seen fewer Covid-19 cases,” he said.
Like many economists, Williamson made the point that social distancing measures are likely to remain in place for the foreseeable future. This will mean the capacity of businesses such as shops will be reduced and some firms may not be able to reopen at all.
Andrew Wishart, UK economist at Capital Economics, said: “Overall, while April may have marked the trough in activity, social distancing restrictions are continuing to depress activity severely.”
Capital Economics thinks the UK economy will shrink by around 12 per cent this year and not regain its pre-coronavirus size until late in 2022.
The survey data gave a “foretaste of the problems” the economy faces, said Cathal Kennedy, European economist at RBC Capital Markets. “In manufacturing, firms noted that plant capacity had been reduced following social distancing measures,” Kennedy said.
The rate of infection is key, said JP Morgan Asset Management’s Mike Bell. “A full and sustainable recovery in the economy will also require progress which allows for the removal of social distancing measures without a rise in infections.”
Investec economist Phillip Shaw said that the unemployment increase and businesses failures mean it is unlikely the UK economy will “regain the 28 per cent or so likely loss in output from pre-pandemic levels by the end of next year”.
A glimmer of hope
Some economists struck a more positive note, however. “The direction of travel is positive,” said Shaw.
Separate data such as energy consumption and car journeys shows “that the economy hit rock bottom in early April and has begun to recover in May,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
He said production was likely lifted by the government’s decision in mid-May to tell some companies in manufacturing and construction that they could reopen.
Tombs said: “We have tentatively pencilled in a three per cent month-to-month rise in GDP in May, following a decline of about 20 per cent in April, and then bigger gains of six per cent in June and eight per cent in July as schools, shops and eventually consumer services providers reopen.”
Analysts say government support essential
Government support measures will be key to the recovery, said JP Morgan Asset Management’s Mike Bell. “The key for the outlook is the extent to which fiscal stimulus can prevent redundancies and business closures in the face of the significant hit to revenues for many businesses,” he said.
The UK has released unprecedented levels of fiscal stimulus during the coronavirus crisis. Its “furlough” scheme to pay workers’ wages is currently supporting around 8m people by some estimates.
There has been a surge in unemployment, but it is nothing like that seen in the US, where 20m lost their jobs in April. Yet it is difficult to tell whether there will be a jump in joblessness as the UK schemes are gradually wound down.