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14 September 2020: En route

The latest brief from the bank’s chief economist.

Last updated: 14 Sep 2020 5 min read

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July’s GDP figure signalled a sustained expansion for the UK economy. And high-frequency indicators show this is likely to have continued through August. However, that was the easier leg of the recovery journey. The labour market, in particular, is delicately placed.

Hard yards 

The UK’s economic recovery looked robust through the summer. GDP expanded by 6.6% during July, following an 8.7% rise in June. We’ve climbed about halfway out of the coronavirus-induced economic hole. But the sectoral disparities remain pronounced. Finance and insurance were off a mere 1.4%, while hotels and restaurants were still down 60%. The good news is recent data shows the recovery continued through August. And school returns will give a decent lift from the education sector. The bad news is much of the low-hanging fruit has been plucked. It gets harder from here.

On the rise 

During the seven days to 11 September, 19,000 new Covid-19 cases were recorded in the UK – an increase of 80% over the previous seven days. To limit the future increase in the spread of the virus, new restrictions on gatherings were introduced, with additional local restrictions to boot. In Scotland, a new contact-tracing app was launched last week. England and Wales will follow suit by the end of September. Let’s hope that this will be enough to stop the second wave and a general lockdown.

In the fast lane 

Excluding those permanently closed, 99% of businesses have reopened. Road traffic and shipping volume is close to pre-lockdown levels. For the third month running, more companies showed revenue increasing rather than decreasing. Fast indicators tracked by the Office for National Statistics reiterate that the rebound from the lockdown abyss has been strong. But this was the easy part: 11% of the workers are still furloughed. Online job adverts declined in early September and footfall in high streets and shopping centres remain 25% below pre-lockdown levels. In addition to the epidemiology, labour market dynamics and consumer behaviour will determine the pace and extent of the recovery.

Inflated opinion 

Annual rates of UK Consumer Prices Index inflation have been below 2% for the last 12 months. However, the public still believes prices are running well above that figure. The Bank of England’s latest quarterly survey of public attitudes to inflation was undertaken between 11 and 16 August. One in four people thought that consumer prices had risen by over 4% year on year, with the median for all respondents 2.6% year on year. The latter is more than two-and-a-half times the latest figure for July. Looking ahead, the expectation is for prices to rise by a perky 2.8% over the next 12 months and at that pace for the next five years.

Rapid reversal 

The pandemic has turned many parts of life on its head. One of those is our trading relationship with the rest of the world. The UK has run a trade deficit for decades, meaning that we’ve imported more goods and services from other countries than we’ve sold to them. That’s been true every year since 1998. But Covid-19 caused the mother of all shocks to global supply chains, hugely disrupting trade. Now things are flowing again but imports are more depressed than exports, leading to a surplus of £1.2bn in July. As attention turns to the EU-UK trade negotiations, there could yet be some more swings in this story.

Actually not 

So, it’s April, the plane-free skies are blindingly blue, and the streets so empty a deer runs down the Morningside Road, a well-to-do Edinburgh suburb. Would UK-based investors think this an apt time to increase their acquisition of foreign companies? Yes they would. The acquisition value of foreign firms by UK ones increased in Q2 to £4.3bn, from £4.1bn in Q1. But statistics fail here. Because the number of transactions fell from 88 to just 20, while the value of acquisitions of UK-based firms dropped by 58%. So unsurprisingly, lockdown didn’t raise investors’ animal spirits.

On hold 

The European Central Bank (ECB) left policy on hold at its September Council meeting, as expected. The ECB maintained purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350bn. The ECB staff nudged higher its medium-term inflation projections from June, despite a disappointing inflation print in August. ECB president Christine Lagarde acknowledged the euro’s recent rise but signalled no early policy response, providing the green light for further potential gains. Ongoing disinflation pressures and increased signs from latest monthly business surveys that the euro area recovery is stalling point to scope for further ECB action in coming months.


The US economy has already recovered 48% of the jobs lost due to Covid-19 and the unemployment rate dropped to 8.4% in August. However, the recovery is losing its pace as initial jobless claims remained unchanged last week at 884,000, with Pandemic Unemployment Assistance (PUA) increasing by 91,000. The fourth straight increase in PUA could be due to further job losses triggered by the end of the payroll protection programme and the end of the enhanced employment benefits. The new fiscal stimulus that still hangs in Congress, could make or break the path of further recovery.

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