U.K. Economy’s Lackluster Growth Signals Slower Recovery

The U.K. economy’s expansion was much weaker than expected in May, casting doubt on how fast the nation can rebound from the depths of the coronavirus slump.

Disappointing figures for growth came as the country’s fiscal watchdog outlined the strain on government finances from the billions spent to help businesses and workers through the crisis. It said the budget deficit could balloon to 21% of output this year, and the debt ratio will stay above 100% for the next five years.

The news will add pressure on Chancellor of the Exchequer Rishi Sunak to consider doing more to aid the economy while outlining how he plans to bring public finances under control. They may also temper some of the optimism expressed by Bank of England policy makers about the pace of the rebound being better than initially anticipated.

U.K. Economy’s Lackluster Growth Signals Slower Recovery

The data from the Office for National Statistics showed the economy expanded 1.8% in May. That fell well short of the 5.5% pace expected and leaves the economy almost 20% smaller over the latest three months. While activity has since picked up as lockdown restrictions eased, the U.K., along with many other nations, remains a long way from approaching anything like a full recovery.

The pound fell against the dollar for a second day. Worries about U.K. prospects also drove demand for government bonds, driving two-year yields below Japan’s for the first time ever.

With non-essential retail shops reopening in June, and restaurants and pubs following suit a month later, economists say incoming data should show a much sharper rebound.

“Nevertheless, with risks to the outlook tilted to the downside, it remains crucial that policy makers at the Bank of England and in government remain aggressive in their efforts to stimulate demand and return the economy to closer to its potential as quickly as possible,” said Kallum Pickering, senior economist at Berenberg.

The data for May shows that the economy is on course to decline by 20 to 25% in the second quarter, according to the National Institute of Economic and Social Research.

Hours after the ONS release, the Office for Budget Responsibility said the economy will shrink as much as 14.3% this year, based on its pessimistic scenario.

U.K. Economy’s Lackluster Growth Signals Slower Recovery

Even its upside projection sees a slump of more than 10%, which would be the worst in three centuries. The budget deficit will expand to between 13% and 21% of GDP --- reflecting increased spending and the drop in economic output -- and net debt will stay above 100% for the next few years.

Unemployment is expected to peak at 11.9% at the end of the year, though under the worst scenario it could reach as high as 13.2% early in 2021, the OBR said.

Crucially, the estimates don’t include the impact of measures announced by Sunak last week, The OBR puts the stimulus and extra spending on public services at around 50 billion pounds ($63 billion), which would take the deficit to 372 billion pounds, Chairman Robert Chote said in an online presentation.

U.K. Economy’s Lackluster Growth Signals Slower Recovery

What Bloomberg Economists’ Say

“The unexpectedly weak bounce in GDP for May shows a V-shaped recovery remains elusive. Output remained about 25% below its pre-virus peak even as restrictions were lifted. The economy is facing a slow road to recovery with social distancing measures still hampering many businesses and households nervous about spending.”

-- Dan Hanson, senior U.K. economist. Read his full REACT.

The OBR outlook is more gloomy than the latest Bloomberg survey, where the median estimate was for a drop of almost 9% this year. Few predict a rapid recovery, with output still likely to be lower at the end of next year than it was before the crisis struck.

With unemployment set to surge as government wage subsidies are withdrawn, Sunak last week announced a 30 billion-pound ($37.5 billion) stimulus package in an effort to revive confidence among consumers and businesses.

“Today’s figures underline the scale of the challenge we face. I know people are worried about the security of their jobs and incomes,” Sunak said after the data.

©2020 Bloomberg L.P.

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