United Kingdom: GDP outlook remains fragile – UOB

Economist Lee Sue Ann at UOB Group reviewed the latest set of data releases in the UK economy.

Key Quotes

“UK’s economy’s expansion was much weaker than expected in May, casting doubt on how fast the country can rebound from the depths of contraction caused by the COVID-19 pandemic. GDP expanded 1.8% m/m in May, short of the 5.5% m/m pace expected, and leaving the economy contracting by almost 20% over the latest three months.”

“Overall, the services sector, which makes up around 80% of the UK’s economic output, grew by just 0.9% m/m in May, following a 19% m/m decline in April.”

“Inflation unexpectedly accelerated in June, pushed higher by the cost of clothing and games. CPI increased 0.6% y/y, following May's four-year low reading of 0.5% y/y. Core CPI, which excludes volatile energy and food prices, picked up to 1.4% y/y, from 1.2% y/y previously.”

“The jobless rate remained unchanged in May at 3.9%, much better than expectation of a surge to 4.7%. The claimant count change showed an unexpected decrease last month… These numbers will be heavily scrutinized next month, as it remains to be seen whether some employers have sought to get themselves ahead of the game regarding giving notice to staff before the furlough pay cliff hits.”

“We believe the latest move by the BOE is unlikely to mark the end of its efforts to counter the economic slump, and we forecast a further extension of GBP100bn by the November meeting. A further option is for the BOE to make changes to the Term Funding Scheme (TFS). This could give lenders access to funding below the Bank rate, assuming they increase lending to businesses (specifically SMEs).”

“The Office for Budget Responsibility (OBR) has predicted that the UK economy would shrink by 12.4% in 2020. Our 2020 GDP forecast stands at -7.6%, but much will depend on how quickly consumer confidence recovers.”