Weak growth signals slower U.K. 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 per cent of output this year, and the debt ratio will stay above 100 per cent for the next five years.

The news will add pressure on Chancellor of the Exchequer (Finance Minister) 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.

The data from the Office for National Statistics showed the economy expanded 1.8 per cent in May. That fell well short of the 5.5-per-cent pace expected and leaves the economy almost 20-per-cent 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.

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 show that the economy is on course to decline by 20 to 25 per cent 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 per cent this year, based on its pessimistic scenario. Even its upside projection sees a slump of more than 10 per cent, which would be the worst in three centuries.

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

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 (US$63 billion), which would take the deficit to 372 billion pounds, chairman Robert Chote said in an online presentation.

The OBR outlook is more gloomy than the latest Bloomberg survey, where the median estimate was for a drop of almost nine per cent 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 (US$37.5-billion) stimulus package.

THE ECONOMY IS ON COURSE TO DECLINE BY 20 TO 25 PER CENT IN THE SECOND QUARTER.