UK worst hit economy in Q2

Emily Nicol
Chris Scicluna

Key points:

  • UK was worst hit economy in Q2
  • Australian consumers more downbeat as pandemic revives

UK GDP posts steepest fall of all major economies in Q2:
As expected, this morning’s data have confirmed that the UK was one of the worst hit of all major economies from the Covid-19 shock. Following the initial drop of 2.2%Q/Q in Q1, UK GDP fell at a record rate of 20.4%Q/Q in Q2 – a sharper fall than all other major economies last quarter – to be down 21.7%Y/Y.

Looking at the first half of the year as a whole, the UK’s cumulative decline of 22.1% was exceeded only by Spain (-22.7%), was more than double that in the US (-10.6%), and was also more than 10ppts steeper than in Germany (-11.9%). It was also more than three times the full peak-to-trough drop in UK output recorded over five quarters during the global financial crisis. The UK’s particularly poor performance reflects the later and thus longer imposition of lockdown restrictions as well as the relatively larger share of GDP accounted for by activities requiring face-to-face interaction (so-called social consumption, including leisure, hospitality and transport).

Of course, the steep drop in UK GDP principally reflected the extreme contraction in March and April as the country went into lockdown. But while GDP subsequently edged up in May (an upwardly revised 2.4%M/M) and accelerated 8.7%M/M in June, the level at the end of the quarter was still a marked 17.2% below February’s pre-lockdown peak.

Needless to say, all major categories of domestic expenditure posted record quarterly declines in Q2. Private consumption fell 23.1%Q/Q to account for about 70% of the total drop in GDP. Government expenditure was down 14.0%Q/Q, due principally to lower healthcare and education activity. And strikingly, business investment plunged 31.4%Q/Q, more than three times the drop during the global financial crisis and contributing to a decline in total gross fixed capital formation of 25.5%Q/Q.

Exports fell a somewhat more moderate 11.3%Q/Q, albeit with services exports hit much harder. Imports dropped at more than double that pace (-23.4%Q/Q due principally to lower imports of machinery, equipment and transport items) so that the UK recorded a rare trade surplus of 4.0% of GDP (1.9% excluding precious metals).

Perhaps inevitably, there were record quarterly falls in all main sectors in Q2. Output of services was down 19.9%Q/Q with the accommodation and food services subsector down 86.7%Q/Q. Production was down 16.9%Q/Q with manufacturing output down a little more than one fifth and output of transport equipment roughly halved. And construction output fell 35.0%Q/Q.

Of course, by June, most sub-sectors had returned to growth following the easing of restrictions on activity. But while services grew 7.7%M/M that month the level was still down 17.6% from February. Likewise, production was still down 11.6% from before the lockdown despite growth of 9.3%M/M in June. And while construction jumped 23.5%M/M in June it was still about one quarter below February’s level.

All the evidence – such as yesterday’s Barclaycard spending data – points to ongoing recovery in July and probably August too. And so we expect to see record growth in GDP in Q3 in excess of 17%Q/Q. However, a shortfall relative to the pre-crisis level is likely to persist for several quarters. Indeed, while the BoE’s central projection anticipates that milestone will be passed at the end of 2021, we fear it will take even longer than that as sharply rising unemployment weighs on private spending. Clearly, a renewed wave of pandemic when the weather turns for the worse in the autumn would be particularly damaging, as would a self-harming failure to agree an FTA with the EU when the Brexit transition period concludes at end-year.

Australian consumer confidence falls back near post-Covid trough:
With the resurgence of coronavirus cases in the State of Victoria having seen restrictions reinstated and today’s ABS wage figures reporting that annual growth (1.8%Y/Y) slowed in Q2 to its weakest in the series 22-year history, today’s Westpac consumer confidence survey was inevitably downbeat. In particular, the headline sentiment index fell a further 9.5% in August to 79.5, just 5.1% above the April trough, which itself was the lowest since early 1991.

While the weakness was broad based, households were seemingly most downbeat about the economic outlook over the coming twelve months, with the relevant index plummeting 19% to 53.6, just below the April trough. And so, given also a spike in job-loss concerns, a smaller share of households assessed it a good time to buy a major item – the relevant survey component was down more than 13% on the month to be 26½% lower than a year earlier.

By location, perhaps surprisingly, the largest fall in sentiment was seen in NSW (-15.5%), significantly exceeding the drop in Victoria (-8.3%). And even in Queensland, where Covid cases remained very low, confidence also fell sharply (-8.1%). As such, Westpac expects some of this weakness to be reversed over coming months. This notwithstanding, with risks to the near-term economic outlook skewed to the downside, employment prospects set to deteriorate over coming quarters as the government’s job support schemes are phased back, and wage growth expected to weaken further, consumers seem bound to maintain a cautious approach to their spending habits.

June rebound in euro area IP to be confirmed:
Looking ahead, this morning will bring euro area industrial production figures for June. Following strong growth in manufacturing output in the large member states, we expect to see an increase of about 10%M/M in the aggregate euro area IP, after growth of 12.4%M/M in May. This would mean that roughly two-thirds of the initial drop between February and April had been reversed, but output would still be about 10% below the pre-pandemic peak. Also due this morning are final Italian CPI figures for July for which the flash estimate on the EU measure jumped 1.5ppt to 0.9%Y/Y, the highest level in fourteen months, as the start of the summer sales period for clothing and footwear was postponed. For the same reason, core inflation on the EU measure rose 1.6ppts to 2.1%Y/Y.

Look ahead to today’s US data:
In the US, today will bring the latest CPI figures. While prices are expected to have risen a further 0.3% on the month in July due not least to higher energy prices, this would see the annual inflation rate tick only slightly higher to 0.7%Y/Y. Another rise of 0.2%M/M in prices excluding food and energy would see core inflation edge lower from 1.2%Y/Y in June.

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