Are There Any Signs of an Economic Recovery in Britain?

Summary

• Bank of England says that UK on course for a V-shaped recovery
• UK economy shrunk by 2.2 percent during its first quarter
• Consumer spending data shows improvement: Barclays Bank
• Sainsbury saw an 8.2 percent increase in its Q1 2020 like-for-like sales

While it might be too early to get a clear view of things, but we would like to see the half glass-filled side of the picture. Yes, there are indications that the UK economy is already on the path of an economic recovery. Andy Haldane, Chief Economist, Bank of England remarked that the country’s economy is recovering faster from the impact of the coronavirus led crisis than earlier expected.

Economists typically describe three types of recovery styles – L, U and V shaped. While the first one is the slowest type, accompanied with high unemployment and almost stagnant growth rates, and may mean recessionary times for many years. On the other hand, a U-shaped one is much faster than the first one, and makes the economy bounce back to its earlier levels in a year or two at the most. The last one or the V-shaped recovery would mostly showcase a fast slowdown in the economy over a brief period, followed by a clear and strong recovery, typically within a year.

The UK economy was badly hit by the unprecedented impact of the coronavirus pandemic. The country went into a lockdown on March 23 to contain the spread of the flu infections. While this period saw a falling demand for goods and services, it also saw a consequent rise in household savings.

Is a V-shaped economic recovery on cards?

In fact, Haldane feels that Britain’s recovery being witnessed is V-shaped, which means a sharp rise after a steep downturn. At the same time, he seemed worried about high-unemployment levels in the country.

With the opening up of the lockdown, the consumer spending has begun to rise, which is a healthy sign, but once the government furlough scheme is withdrawn, starting this August, rise in unemployment levels may be a cause for concern, he opined.

It is pertinent to note that the revised GDP figures for Q1 2020 were released recently by the UK Office of National Statistics and said that the UK’s GDP contracted by 2.2 percent, treading in the negative territory, for the first quarter of the year 2020. The earlier estimates had pegged this figure at minus 2 percent. The GDP numbers for April 2020, the first month of the lockdown, also revealed a sharp contraction in the economic output of the nation by 20.4 percent. Further, the BoE predicts the economy to contract by 20 percent during Q2 2020. Its earlier estimates for the same period stood at a higher rate of minus 27 percent.

Consumer spending data from the Barclays Bank showcases recovery

Fabrice Montagné, UK Economist, Barclays Bank said that a definite recovery is taking place if we go by the changes in the consumer spending data. The latest Bank’s survey findings revealed that sale of clothing and footwear in physical retail shops improved in the week starting June 15, 2020.

Data suggested that sales for this week were down by only 34 percent as compared to its last year levels; this is much better than a 92 percent fall seen during the last week over its corresponding value a year ago. The Bank feels that with social restrictions easing out, the demand might just pick up sooner than expected.

Early this June, Montagné said that the UK economy is already running at 85 percent of its capacity, according to the Bank’s high-frequency economic data indicators.

Retail sector is leading the economic recovery

Retail sector is definitely leading the recovery trends, after the lockdown restrictions have eased in the UK. In fact, retail spending rose by 6.2 percent in May 2020 year-on-year, according to the Barclays Bank’s UK consumer spending report. Further, the online grocery buys rose by a whopping 103.9 percent for the month, according to the same report.

The sectors that are yet to show an upturn include leisure, hospitality, travel, pubs, hotels, and restaurants. After around three months of being in lockdown, the non-essential sector will be reopened beginning July 4, with a new one-meter social distancing rule in place. People will be allowed to go to cinemas, religious places, weddings, camping trips, pubs, restaurants, and libraries, provided they adhere to the safety and hygiene measures.

Sales rise for the Sainsbury’s Group

The UK’s second largest supermarket chain Sainsbury saw an 8.2 percent increase in its Q1 2020 like-for-like sales. The general merchandise sales rose by 7.2 percent for the quarter. In fact, the group’s total grocery sales jumped by 10.5 percent during the 16-week period ending 27 June 2020. Sales at the company’s digital platform have doubled during the quarter, as compared to the same period a year ago.

Q1 2020 results for J Sainsbury plc

(Source: company website)

However, all is not rose, as the clothing sale for the group dropped by a hefty 26.7 percent during the quarter. The company expects that the profits will be hit by more than £500 million for the quarter, mainly due to the impact of coronavirus pandemic. 573 Argos standalone stores were physically shut down for most of the quarter, while online sales continued and were a major saviour.

The stock of J Sainsbury plc (LON:SBRY) traded at GBX 205.30, down by 1.63 percent on 1 Jul 2020 at 1:29 pm. Its 52-week low/high range was recorded at 174.95 / 235.80.

SBRY Stock performance during past 3 months

(Source: Thomson Reuters)

The UK Government is bringing forward capital investment worth £5 billion to quickly give a big boost to the nation’s economic activities. This spending will go towards building roads, hospitals, schools, colleges and infrastructure.

So, while the UK economy is seen to be on the path of a sharp V-shaped economic recovery, high unemployment levels do seem to be a major concern in the coming few months, at least. The recovery is being led by higher consumer spending across the retail sector. Further, with the non-essential sector opening up from 4 July, there is hope for an economic upturn across this sector as well.