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10 August 2020: Squeeze the brake pedal

The latest brief from the bank’s chief economist.

Last updated: 10 Aug 2020 5 min read

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So exclaimed Boris Johnson as local clustering cases rose in the UK, especially in the north of England. The re-imposition of restrictions has so far been limited to social gatherings rather than businesses. This is likely to result in a moderation, rather than a reversal, of the recovery. OK. But a second wave would change this quickly.

Glass half full

The Bank of England stuck to its prediction of a V-shaped recovery in its latest forecasts. After shrinking an estimated 21% in 2020 Q2, its central projection shows the UK economy rebounding sharply over the next six months to end the year 5% below the previous peak. Unemployment is projected to top out at 7.5%. But that’s assuming the effects of coronavirus steadily fade away, paving the way for a strong recovery in consumer spending. Optimistic maybe. Risks are firmly “skewed to the downside”. To derive some comfort, the BoE also conducted a reverse stress test with two severe scenarios: “slow recovery” and “double dip”. The Monetary Policy Committee (MPC) continued to find the UK banking system resilient even to these severe shocks.

Loose for longer

Absent any actual policy changes, the MPC emphasised that policy would remain supportive for as long as needed to sustain the recovery. New guidance states that the MPC doesn’t intend to tighten until there is “clear evidence” of “significant progress” being made in eliminating spare capacity and sustainably meeting the 2% inflation target. Those waiting for a sign that interest rates are likely to be cut to negative territory will have to be patient, though. They’re “part of our toolbox… but at the moment we don’t plan to use them” said BoE governor Andrew Bailey.


In what can be termed positive news these days, the BoE’s decision-maker panel survey underlined a continued recovery to the economy. Just over 18% of workers were still on furlough in July, down from more than 25% in figures released by the Treasury in June. Similarly, forward-looking estimates of the impact on sales, employment and investment were less gloomy, relatively speaking. But causes of concern remain. The labour market is still expected to go through excruciating pain later in the year. And a high level of uncertainty still prevails, with more than three fifths of respondents now believing that it will not dissipate until June 2021. It’s still a long road ahead.

Going through the gears

Another week, another slew of businesses reopening. The Office for National Statistics (ONS) reported that 3% of businesses had recommenced trading in the last fortnight, taking the share of firms now operating up to 94%. Yet operating doesn’t mean firing on all cylinders: 32% of firms that have reopened are pulling revenue that’s down by more than 20% on pre-coronavirus times. Perhaps surprisingly, however, only 16% of firms report turnover below operating costs. That shows impressive cost control for such a monumental shock to revenue.


Data comes in many forms, and sometimes words offer insights that numbers struggle to articulate. The ONS has explored the most common words firms use when answering surveys, a kind of Pavlov’s dogs for lockdown. The results capture the past few months perfectly. So, the most common response to questions about turnover is “closed”. Yet, thankfully, this is declining, from nearly half of firms in March (46.5%) to just 17% in July. The most common response to questions on the government schemes has been “easy”. Seems about right. And firms will soon be adding the word “extend”.

Tug of war

Car sales increased by 11% year on year in July, the first full month of trading for UK dealerships since the lockdown. The support came from a 20% increase in private new car registrations, underpinned by pent-up demand, inventory offloading, special finance offers and a new breed of customers trying to avoid public transport. However, cautious optimism is restrained by tight budgets. Overall registrations are still down 42% in the year to date. Moreover, the most popular models were ‘super mini’ and lower-medium-sized cars as households face a tight budget. With significant labour market stress ahead of us, the future is hanging in the balance.

So V, again

Euro area retail sales posted a 5.7% month-on-month increase in June, on top of the upwardly revised 20.3% rise in May. As a result, the levels of sales are now back to those seen in pre-crisis times. Interestingly, online sales fell for the first time since the crisis, pointing towards the return of consumers to the high street. But the cheer has been tempered by large cross-country variations. Germany and France are leading the pack, but sales in the southern economies remain relatively weak. Looking ahead, rising unemployment and the strengthening of the second wave of infections pose a risk to future spending.

Slowing recovery

Recently, the US labour market has whipsawed between record job losses and gains. Despite a resurgence in infections, July exceeded Wall Street expectations with a gain of almost 1.8m jobs. But this was down on the 4.8m rise the previous month. The 9.3m jobs gained in the past three months represent just 42% of the positions lost in the two months prior. These “easy” gains are due to the reopening of closed establishments. Unemployment fell from 11.1% in June to 10.2% last month, although remains higher than the peak after the last recession. Things may be moving in the right direction but the hard yards in job creation lie ahead.

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