The spread of the virus in the UK now seems to be suppressed, albeit at higher levels than the government would like. The number of new daily cases has yet to consistently stay under 500, whereas Italy has managed to keep it under 300, and Spain’s had also dropped below 500 before a recent pickup. However, as in other European countries, the gradual reopening of the UK economy is well underway. Some businesses resumed operations in May leading to expectations of monthly GDP growth of above 5%. The outturn of 1.8% was disappointing. Given the 20% fall in April — the worst month of the crisis — this means that the economy is nearly 25% smaller than it was in February. Yet, April and May were always likely to be the worst months and we are expecting much-improved numbers in June, when many non-essential retail businesses reopened.
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However, the economic costs of the lockdown are still unclear. The government’s furlough scheme has hidden the true state of the labour market with headline unemployment figures largely unchanged throughout the duration of the pandemic. A better measure for the current situation is the total number of hours worked, which has fallen to the lowest level this millennium. There is a substantial risk that companies feel they are not able to recall workers after the furlough period ends. The scheme is not due to end until October, and with this in mind the UK chancellor has recently announced a £1000 bonus for each employee that a firm brings back.
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Key to all of this will be the actions of the consumer. As seen in the chart below, household savings grew by over £25bn in May — the largest jump on record, following record-breaking increases in March and April. The prospects for recovery depend on what proportion of these savings is precautionary, and what is forced. Forced savings, due to shops and restaurants being closed, are not likely to last. As evident from the surprise in US retail sales, there is pent-up demand for products and services that were not available during lockdown. And there is certainly money to be spent. But, how soon precautionary savings are spent is far less certain — will animal spirits return to overcome the economic scars?
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