Is W-inter coming to the UK economy?

COMMENT Six months ago I wrote about the potential shape of the UK economic recovery and concluded that there was no prospect of a V-shape and that the most likely outturn was a “swoosh” or italicised L-shape. At that time there was a widely held perception that September would bring a return of activity and relaxation of restrictions. Broadly these expectations came true, with August showing a 2.1% month-on-month rise in GDP, a very respectable number (albeit half the level that many forecasters were expecting). While September’s GDP number has not yet been released, other indicators such as workplace occupancy and mass transit usage point to a relative return to normality, albeit within the boundaries of social distancing. Q3 2020 now looks like it will post a record 15% rise in GDP, which can leave nobody in any doubt that the recovery is under way. October has, however, brought a number of expected and unexpected challenges, and my forward view is that these will combine to deliver a slower-than-expected recovery in the UK economy over the winter and spring. The expected challenge is unemployment, and the latest ONS labour market report covering the three months to August came with a set of revisions in recognition that the sample had become biased during the first half of the year. These revisions lifted the main International Labour Organization unemployment rate through to July from 4.1% to 4.3%. The latest data for August then showed a further rise in the unemployment rate to 4.5%. This is broadly as expected, and there is no doubt that this rise will continue as the UK furlough scheme winds down at the end of October. The less-expected challenge is the spectre of local or even national lockdowns of some sort. Interestingly, there is little evidence that the government’s change of stance on working at home in September had much impact on the very gradual return to the CBD that had been happening. This suggests that people are becoming confused or bored by changes to health policies. This ennui has probably contributed to the need for local lockdowns, and our current view is that these will drag on the service side of the economy more than manufacturing during the autumn and pre-Christmas period. The office-based side of the service sector will be less impacted by these lockdowns than it was in the spring and summer, as all companies and workers are now used to working from home and thus productivity levels should be sustained. The key question for the next three months is whether further lockdowns will dramatically impact spending on Christmas. While there will undoubtedly be significantly less money spent on the leisure side of the economy, we do not expect a sharp U-turn in the overall story on retail sales. Christmas 2020 will see the normal spike in spending on food and other goods, and there is a reasonably credible argument that the precautionary saving trend that has risen significantly over the late summer period will be briefly reversed as people treat themselves and their families more than normal. If this does happen, then it will compensate for any lockdown-related hits to leisure spend, and thus head-off the prospects of a W-shaped recovery that some commentators have started to suggest might be on the cards. Mat Oakley is head of UK and European commercial research at Savills Picture © NASA/Shutterstock