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  • KPB & Co Research

Synopsis

Data from the Office for National Statistics (ONS) show that in the month of May 2020, the Gross Domestic Product ( GDP ) of the United Kingdom recovered marginally on the back of a bounce in manufacturing and construction activity as lock-down measures eased. When compared to pre-COVID-19 levels, GDP was still down double digits, underscoring the likelihood that the country faces a long road ahead to a full recovery. The Chancellor of the Exchequer - Rishi Sunak - recently outlined plans to jump-start hiring as he seeks to "take the crutches off" the UK economy come October, however in a scenario where economic activity remains subdued, he might have to delay the move until later in the year.​

UK Economic Activity

For the month of May 2020, GDP was 1.8% higher relative to the level seen in April-2020. The slight recovery seen in the month follows back-to-back monthly declines in economic activity of 6.9% and 20.3% in March-2020 and April-2020 respectively. The positive up-turn for month reflected a 6.0% growth in production, and a 8.2% growth in construction, which were offset mainly by services that grew by 0.9%. Month-to-month changes in GDP is volatile and so is unlikely to reflect trends as good as a 3-month rolling estimate would. Cumulative GDP for the three (3) months ending in May-2020 was 19.0% below that of the three months ending in February. This decline follows declines of 10.8% in the 3 months ending April and 2.2% in March. Lock-down measures across the UK began in earnest on March 23 2020, which coincides with the rapid fall off in economic activity seen around that period.

Distribution of Declines

The decline in economic activity was broad-based with all sectors recording above normal declines. According to data from the ONS, services declined by 18.9% in the 3-months ending in May-2020 relative to the 3-months ending in February, while production declined 15.5%, and construction 28.9% over similar periods. Within the production sub-sector, the biggest driver was the decline seen in Manufacturing (-18.0%) - due mainly to the manufacture of transport equipment, but there were also significant declines in "electricity, gas, steam and air conditioning supply" (-9.8%) and "mining and quarrying" (-10.7%) in the face of business shut-downs and falling industrial demand. In services there were quite a few sub-sectors that made substantial contribution to the weakness in the economy. "Wholesale, retail, and motor trade" declined by 23%, "Accommodation and food services" down 71%, "Education" down 37.8% and "Human Health and social activities" down 24.2% are some of the areas that had the largest impact on the economy. The declines in services were driven by a combination of school closures, fewer operations, accident, and emergency visits at health facilities, closure of bars and restaurants, and reductions in new car registrations. Construction reflected primarily lower private new housing and private commercial construction, which fell by 42.5% and 29.5% respectively.

​Concluding

T​here is tremendous uncertainty about how things will unfold over the next year. Given the fall-off in economic activity already, the government desire to continue with Brexit, and government's desire to end economic support, it is quite likely that the country will face a protracted state of sluggish economic activity. There are also growing signs that until a vaccine is discovered there will have to be intermittent periods where economies go back into lock-down mode. With this in mind, monetary and fiscal policy has co-ordinate to ensure that the conditions remains largely supportive for growth.


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