U.K. Economic Revival Is Clouded by Debt, Job Losses and Brexit

(Bloomberg) -- The U.K. economy rebounded faster than expected in August but the figures were clouded by warnings of an impending crisis for retailers, a jobs crunch, ballooning public debt, and signs that trade talks with the European Union will fail.

While IHS Markit’s monthly Purchasing Managers Index, which measures private-sector business activity, jumped to a seven-year high, the report showed that business confidence declined and companies continued to cut jobs.

Employment fears also proved a drag on consumer confidence, taking the shine off data showing retail sales volumes recovering to pre-virus levels.

The British Retail Consortium said the sales figures “mask a crisis” in the sector. Marks & Spencer Group Plc this week announced 7,000 job cuts, adding to a string of bad news on employment and store closures in recent weeks.

Hours later, U.K. and EU officials said there’s been little progress in talks for a trade deal when the Brexit transition finishes at the end of the year. That sent the pound to fresh lows on the day.

What Bloomberg’s Economists Say...

“We expect things to get tougher in the fall as the government’s furlough scheme ends and unemployment increases. The speed of recovery is likely to take a big leg down in the fourth quarter.”

--Dan Hanson. Read the full REACT

The U.K.’s upturn so far has been fueled in part by huge state spending that’s pushed government debt above 2 trillion pounds ($2.6 trillion) for the first time. While that’s affordable for now because of ultra-low borrowing costs, Chancellor of the Exchequer Rishi Sunak said “difficult decisions” will be needed.

One of those is what to do with his flagship furlough program, which has protected millions of jobs and is currently scheduled to end in October. That could mean another hit to the labor market, hitting consumer spending and derailing the economy’s revival from its record 20% slump in the second quarter.

The fragility of the rebound means an extension of the furlough program “in some form or another is necessary,” according to economic historian Robert Skidleksy.

“But it can’t be for too long -- you can’t go on paying people for doing nothing,” said Skidelsky, emeritus professor of political economy at Warwick University. Instead, the government should use the extension to prepare for the next phase of policies to bolster growth and create jobs, he said in an interview.

The dilemma of how to wind down aid, yet still support growth and contain the virus, is also playing out across Europe. Most governments oppose reinstating widespread lockdowns to control the pandemic again after severe restrictions earlier in the year pushed the continent into an unprecedented recession.

The euro-area economy received its own warning on Friday, with the composite PMI for the region unexpectedly falling, signaling a slowdown in its rebound after an initial surge.

That justifies the caution among European Central Bank policy makers, who were reluctant to draw firm conclusions about the health of the economy from the early signs. The ECB and the Bank of England are both considering whether they’ll need to add more monetary stimulus in coming meetings, with economists largely predicting they will.

In the U.K., another report from the Confederation of British Industry showed manufacturing is “stuck in the doldrums.” It said that factory output is still more than 20% below normal conditions.

©2020 Bloomberg L.P.