UK Economy to Enjoy "More Dramatic" Rebound in the Third Quarter says Deutsche Bank

- Recovery to gather pace over summer
- Economy back to 90% of pre-covid levels by Sept.
- Deutsche Bank upgrade growth forecasts
- But numerous high-frequency indicators remain stubbornly poor

Image © Adobe Stock

The UK suffered the deepest recession of any advanced economy in the first half of 2020 as strict lockdown measures left large swathes of the economy unable to operate, however the reopening that culminated in the early July opening of the hospitality and leisure sector should make for a solid rebound.

Data for the second quarter out on Wednesday showed a slump in growth of 20.4% quarter on quarter, which means the UK has suffered the biggest economic decline of any major economy.

One reason for this unenviable accolade is the significant share of the economy taken up by the services sector, which accounts for over 80% of UK economic activity. Shutting down pubs, restaurants, medical providers, schools, arts, entertainment and other contact-orientated service industries left the economy particularly prone.

However, the data shows the economy started to grow once more in May and June, but the unlocking of swatches of the services industry in early July should add fuel to the recovery.

"We think the Q3 bounce will be more dramatic with activity data already up markedly over the summer," says Sanjay Raja, Economist at Deutsche Bank. "The economy's slump ended in May. Both May and June GDP bounced, erasing some of the 26% drop between February and April. As things stand, the economy is now 17% below its pre-virus levels - slightly better than we expected."

Services sector breakdown

Above: The services industry was particularly hard hit by lockdown, but the subsequent unlocking should see the sector contribute to the rebound.

No doubt underpinning the rebound in the services sector in the third quarter will be the government's Eat out to Help Out scheme, which sees the government subsidise restaurant and pub meals from Monday through to Wednesday in August.

Data from the government released this week shows the scheme has been well received with 10.5 million meals claimed under the scheme and some businesses reporting business in the early part of the week was now in fact higher than at the same point in 2019.

"Our growth trackers have moved up markedly over the first half of summer. July/August data has jumped. Mobility data continues to trend up, and other activity metrics have also improved notably. Particularly, restaurant bookings have picked up (especially following the Chancellor's 'Eat Out to Help Out' scheme), and box office revenues have also risen, albeit from a very low base. While there's still plenty of room to improve, these trends are encouraging," says Raja.

Open table booking trends

Deutsche Bank economists say the economy is on track to get back to around 90% of the UK's pre-virus levels by the end of September.

As a result of the slightly better numbers today, Deutsche Bank have tweaked their economic outlook for the UK and now expect growth to drop by 11% in 2020, which is 0.5% less than previously forecast. They expect next year's bounce to be slightly better as well, given the strong starting point and forecast 2021 growth at 4%, up 0.3%. However, this is still a level below where the consensus amongst the economist sees growth in 2021, which is at 6%.

While the outlook has improved somewhat economists remain wary of significant hurdles that must still be overcome before the economy fully recovers, with a number of short-term indicators of concern being: 

- a very gradual recovery in terms of movement in London which is only 50% back to normal
- box office revenues only 3% of what they normally are
- public transport usage rwell below normal at around 30% of potential
- Heathrow remains almost 90% down relative to last year
- Job adverts 50% of their 2019 levels
- Searches for redundancy hit their highest in July

GDP statistics from the ONS on Wednesday showed the economy shrank 20.4% on a quarterly basis in the second quarter, which makes for two consecutive quarters of decline which is the standard economic condition for a recession to be declared.

The annual GDP rate stood at -21.7% for the second quarter, which was slightly better than the -22.4% analysts had forecast the ONS to report.

However, the more timely element of the report shows the economy grew 8.7% in June, which beat economic estimates for growth of 8.0% to be reported, and confirms a recovery is now underway.

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