UK Economy: Bank of England Survey Hints at Long Road to Recovery 

© Bank of England

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The UK economy faces a long and winding road to recovery that still leaves it poorer next year than it was heading into 2020, the latest Bank of England (BoE) decision maker survey suggests, even in the absence of any second wave of coronavirus infections in the autumn. 

Corporate sales, a good proxy for the trajectory of the economy, are expected to remain -10% below their pre-coronavirus levels at the end of March 2021, a full year after the began to sink its teeth into the economy.

"In the June DMP survey, businesses expected their sales in 2020 Q2 to be 38% lower than they would otherwise have been because of Covid-19, employment to be 8% lower and investment to be 38% lower," says the Bank of England when summarising the results of its latest decision maker panel survey. "Sales were expected to recover only gradually over the next year with the negative impact from Covid-19 lessening from 38% in 2020 Q2 to 26% in Q3, 16% in Q4 and 10% in 2021 Q1."  

The UK economy contracted by -2.2% in the opening quarter and at a month-on-month pace of -20.4% in April, while June's consensus was for it to shrink by -9.1% in 2020 before rebounding by just 6.2% next year.

But if sales expectations in the BoE's decision maker panel are in any way indicative of the scale of the output loss for the UK, they could mean the economy will have underperformed market expectations. 

"Despite some small flare-ups, which can be controlled with local measures, the UK is continuing to contain the pandemic as it reopens its economy. Aggressive fiscal and monetary policies continue to support the recovery in confidence, investment and spending. We now expect real GDP to contract by 8.5% in 2020 from 9.0% previously, with a stronger rebound in H2 2020," says Kallum Pickering, a UK economist at Berenberg

Of the 40 different economists and firms whose forecasts are collected by HM Treasury on a monthly basis, only 11 of them anticipated a 2020 GDP decline of -10% or more last month, although it might be September before economists have the data they need to decide whether downgrades are necessary. 

Much has been made of the swift rebound seen in IHS Markit PMI surveys both in the UK and overseas, with the latest in the UK being Wednesday's final manufacturing PMI, which rose from 40.7 to 50.1.

"The PMI is influenced by sentiment and is best seen as a rough gauge of whether output is above or below recent norms. The near-10 point leap in June probably is consistent with a rebound in production from April’s nadir, which was 28% below its pre-virus level," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "Nonetheless, production currently appears to be supported by manufacturers working through backlogs of orders accumulated whilst many of them were closed, or severely resource-constrained, during the height of the Covid-19 pandemic in April." 

IHS surveys of Britain's manufacturers indicated a return to growth in June this Wednesday, while Friday's Services PMI will provide insight on Friday into the fortune of the country's largest economic sector that month.

Markets are looking for a move up from 29 to 47, which would leave it just short of the 50 level that denotes the difference between industry expansion and contraction. But PMI indices rising back toward or above 50 confirms only that output fell at a lesser pace, or stopped falling that month.

It says nothing about the scale or pace of the likely rebound in sectoral production and as a result, the economy. Tombs cites IHS measures of employment intentions for thinking the manufacturing recovery will be slower and more drawn out than the PMI indices and markets aniticipate. 

"Investment intentions recently have fallen below the levels seen at the worst point of the 2008-to-09 recession. What’s more, Brexit uncertainty likely will build as the December deadline for a trade deal with the E.U. nears," Tombs says. "We are sticking with our call that manufacturing output will not reach its 2019 level before the end of 2022.W


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