Divergent views point to uncertain prospects for UK economy – Economics & Finance

Most forecasters on Thursday can claim their accuracy in predicting the UK economy will grow by 4.8% in 2019. Second quarter However, due to differing views in the second half of 2021, very few may look back. record.

The figures released by the Office for National Statistics under the heading First Estimates of the National Accounts have helped optimists and pessimists alike.

There is evidence that the best days of recovery are over and the rapid growth in the second quarter shows what can happen once the Covid-19 subsides.

Although GDP was down 4.4% in Q2 compared to its pre-pandemic peak in Q4 2019, most economists believe that the economy will pick up the production deficit caused by the pandemic in Q4. Year.

But it will still reduce living standards by about 3% less than expected at the end of 2021, before the coronavirus outbreak.

For optimists, the most important factor in the data may be that household consumption grew 4.1 percentage points to 4.8 percent of GDP in the second quarter. As consumption is still down 7.3% from its 2019 peak, these figures indicate that people still have room to cut back on savings and waste money in the second half of the year.

There is more room for commercial investment, but this will depend on society’s belief in the macroeconomic outlook.

Overall, the underlying trend in the second quarter confirmed that the UK economic recovery “has been strong and there is plenty of room for follow-up”, said Alan Monks, a British economist at JPMorgan Chase.

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But Monks and other economists warned that the delta coronavirus version appeared to weaken consumer confidence in July, reducing the chances of a sustained recovery in the second half of the year, easing any optimism.

Public consumption above the level at the end of 2019 also reflects downside risks, with the Chancellor of the Exchequer, Rico Sunak, determined to reduce spending after two years of firefights linked to the crisis.

Philip Rush, founder of consulting firm Heteronomics, said the importance of consumer-oriented services in the second quarter badly impacts the next few months and accused the Bank of England in its August forecast: “extremely optimistic”.

“Restaurant reservations and vaccination rates fell in July,” Rush reported, “most other industries are out of trouble for now.”

Other economists are also cautious about future earnings forecasts in the second quarter. Rob Wood, a British economist at Bank of America, said it would become more difficult to sustain growth after closing four-fifths of the gap created in the crisis. He added: “The main benefits of reopening have passed and the policy will soon change from a good wind to a strong wind.”

There are technical reasons to be more optimistic about growth in the coming months, according to the UK’s National Bureau of Statistics, as unusual asymmetries preclude some elements of June’s figures.

Production from the mining and quarrying sectors, including North Sea oil, fell 11.9% in June alone, leading to a 0.7% decline in the entire manufacturing sector. According to the statistics agency, it was caused by the temporary closure of oil rigs for maintenance, bringing monthly North Sea oil production to its lowest level since a 1997 monthly record.

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Cullum Pickering, a British economist at the Berenberg Bank, highlighted other UK-specific features of these figures, particularly in the context of public sector measurements, as schools have fully reopened, visits to general practitioners’ offices have increased. and hospital appointments have increased rapidly. Public sector measurement standards are improving rapidly. Not many other countries have recorded public sector output in this way. Pickering said that compared to other comparable economies, the effect is “extending the UK business cycle.”

“The UK experienced a higher-than-average decline during the lockdown and then recovered relatively quickly,” he said.

Looking ahead, calculations from the Financial Times indicate that the UK economy will gain significant momentum in the third quarter. Although the June production level has not improved in the next three months, the quarterly figures will show a growth of 0.8%.

Line chart of Monthly GDP Index: 2018 = 100 shows that the UK is likely to recover lost GDP in 2021

Of course, this will not close the remaining gap with pre-pandemic production levels. To achieve this by October, the economy needs to grow at 0.7% per month, slightly above May’s growth rate, but below 1% in June. If it meets most economists’ expectations and makes up for lost ground by the end of 2021, it will only have to achieve a monthly growth of 0.4% for the rest of the year.

Hande Kukuk, deputy director of the National Institute of Economics and Social Research, said he expects the economy to grow faster, at least in the third quarter, with growth “in the hypothesis of 19 cases of Covid-19 and ruling out any do internal limits”.

Since then, he said, the most pressing questions will become how much long-term damage the pandemic has caused and how to solve the inequality caused by the virus.

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The answers to these questions are not yet known, but when Sunak makes long-term government spending decisions based on the Bureau of Fiscal Responsibility mid-term forecast in late October, the fall will be significant.

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