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Quarterly Economic Commentary: July to September 2020

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Quarterly Economic Commentary: July to September 2020 Article Quarterly economic commentary: July to September 2020 Economic commentary for the latest quarterly national accounts, prices and labour market indicators. Contact: Release date: Next release: Sumit Dey-Chowdhury 22 December 2020 To be announced [email protected]. uk +44 (0)207 592 8622 Table of contents 1. Main points 2. Gross domestic product (GDP) 3. Institutional Sector Accounts 4. Balance of Payments 5. Labour market 6. Prices 7. Related links Page 1 of 17 1 . Main points UK gross domestic product (GDP) increased by 16.0% in Quarter 3 (July to Sept) 2020, reflecting the easing of lockdown restrictions over this period, as well as some recovery of activity from the steep contraction in April, and is now 8.6% below its pre-coronavirus level. As restrictions were lifted through Quarter 3 2020, there was a sharp increase in household consumption that explains the relatively lower household net lending position of 8.6% in the latest quarter; the rebound in consumer spending explains the quarterly fall in the saving ratio to 16.9%, although this remains elevated by historical standards. The current account deficit was 2.9% of GDP in Quarter 3 2020, capturing large gross trade flows in finished manufactured goods this year as many economies reopened from the most stringent of lockdown restrictions, while there has been less of a rebound in the exports and imports of travel and transport services. Total employment in the three months to October 2020 has fallen by 551,000 since the three months to February, while the latest HM Revenue and Customs Pay As You Earn figures show a stronger fall between February and November 2020, as there are 819,000 fewer people in payroll employment. The annual rate of the Consumer Prices Index including owner occupier's housing costs (CPIH) inflation was 0.6% in November 2020; clothing and footwear was the largest driver of the fall in the annual rate of CPIH between October and November 2020, likely reflecting increased discounting in November. 2 . Gross domestic product (GDP) UK gross domestic product (GDP) increased by 16.0% in Quarter 3 (July to Sept) 2020, reflecting the easing of lockdown restrictions over this period as well as some recovery of activity from the steep contraction in April 2020. There was a cumulative 21.2% fall in GDP in the first half of this year in response to the imposition of public health restrictions to contain the spread of the coronavirus (COVID-19), as well as voluntary social distancing by individuals to protect public health. The level of UK GDP in the Quarter 3 2020 was 8.6% below its pre-coronavirus level in Quarter 4 (Oct to Dec) 2019. More timely estimates1 point towards a slowing in the recovery in the UK economy in October 2020, as further local restrictions came into effect. While the UK economy has increased for six consecutive months following the record decline in April 2020, the 0.4% monthly increase in October was the slowest since then, as the imposition of further public health restrictions particularly weighed on services output in October. This was most notably reflected in a sharp fall in accommodation and food service activities. There was an increase in manufacturing output in October, particularly that of transport equipment, while there was a pickup in the volume of health activity on the month as patient services continued to increase. The Office for Budget Responsibility expects a sharp fall in output in November 2020, with the path of GDP over the following few months depending upon "the effectiveness of the lockdown in bringing cases down, the severity of post-lockdown health restrictions necessary to keep the virus in check, and the response of households and businesses to both the path of the virus and the official restrictions". The latest Business Impacts of Coronavirus Survey finds that 45% of businesses experienced a decrease in turnover compared with normal expectations for this time of year in late November 2020, an improvement from the period in late October when there was a tightening of local restrictions. The Flash UK Purchasing Manager's Index for December 2020 paints a subdued picture for the services industry towards the end of the year, highlighting "restrictions on hospitality, leisure and travel businesses". That said, there was evidence of an overall pickup in activity in the first half of December, which may have reflected the rebound in global trade as well as increased stockpiling in the run up to the end of the EU exit transition period. Page 2 of 17 Figure 1 shows the positions of the G7 economies relative to their pre-coronavirus levels as of the end of 2019. It shows the peak-to-trough falls in output that were experienced in the first half of this year, as well as how much of this has been recovered in Quarter 3 2020. The profiles for each country primarily reflect the spread of the coronavirus, as well as how widespread voluntary and involuntary restrictions were imposed over this period. The pandemic has also had wide ranging effects on industries, as those most reliant on physical interactions experienced the largest contractions. The UK economy has been hit relatively worse than other advanced economies, as it experienced the largest contraction over the first six months of the year. However, the measurement of non-market output is likely to have played a role, specifically the extent to which volume indicators are in place in the UK to record health and education output, as these have been affected by the response to the pandemic. There were double digit declines in the first half of 2020 for all G7 economies, except Japan. None of these economies have yet returned to their pre-coronavirus levels, ranging from a shortfall of 3.5% for the United States up to 5.3% for Canada. The UK had the largest shortfall relative to its pre-coronavirus level as of the end of Quarter 3 2020. Figure 1: Despite record increases in output, the G7 economies remain below their pre-coronavirus levels as of the end of Quarter 3 (July to Sept) 2020 Real G7 GDP, Quarter 4 (Oct to Dec) 2019 to Quarter 3 (July to Sept) 2020 Source: Office for National Statistics, Organisation for Economic Co-operation and Development Notes: 1. All international figures correct as of 17 December 2020. Page 3 of 17 In its latest update, the International Monetary Fund (IMF) forecasts that the global economy will contract by 4.4% this year, then increase by 5.2% in 2021. However, these forecasts are inherently uncertain, particularly in relation to "the path of the pandemic, the adjustment costs it imposes on the economy, the effectiveness of the economic policy response, and the evolution of financial sentiment". The IMF expects that voluntary social distancing will persist into next year until the health concerns are tackled, while countries may have to further tighten the restrictions that are in place depending on the spread of the virus. These are broadly in line with the latest projections by the Organisation for Economic Co-operation and Development (OECD), which expects output to remain persistently weaker than projected prior to the pandemic. While recent progress in developing an effective vaccine has improved the outlook, there is still much uncertainty. The outlook depends on the "magnitude, duration and frequency of new COVID-19 outbreaks, the degree to which these can be effectively contained, the time until an effective vaccine can be widely deployed, and the extent to which significant fiscal and monetary policy actions continue to support demand". There has been an uneven impact of the pandemic on the economy, as reflected in the distribution of the change in how much output each industry has produced. This reflects how the pandemic has led to changes to what is consumed and what is produced. Figure 2 shows the levels of output produced by each services industry relative to its pre-coronavirus levels, capturing the initial effects of the coronavirus pandemic in the first half of this year and how this has evolved in Quarter 3 2020. One feature is how it has been the service industries that have experienced the largest impacts, which have tended to incur smaller declines in previous recessions. This reflects the nature of the public health response to this crisis as well as any behavioural changes, such as social distancing, as the response has been to slow the rate of transmission through physical interactions. The latest Business Impacts of Coronavirus Survey finds that highest percentage of businesses that experienced a decrease in turnover compared with normal expectations for this time of year was in the accommodation and food service (78%) and the arts, entertainment and recreation industries (71%). The Organisation for Economic Co-operation and Development (OECD) finds a similar trend in other countries, where "output fell particularly sharply in service activities requiring close proximity between consumers and producers, or large crowds, or travel" in the initial months of the pandemic. Figure 2: The services industries have tended to have experienced the larger declines in output this year UK, Quarter 4 2019 to Quarter 3 2020 Notes 1. Q1 refers to Quarter 1 (Jan to Mar), Q2 refers to Quarter 2 (Apr to June), Q3 refers to Quarter 3 (July to Sept) and Q4 refers to Quarter 4 (Oct to Dec). 2. Index is referenced to Quarter 4 (Oct to Dec) 2019. Download the data The bounce back in Quarter 3 2020 has been primarily driven by a recovery in private consumption. Figure 3 shows the how the economy has evolved relative to the end of 2019, capturing the cumulative change in GDP and its expenditure components since Quarter 4 2019.
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