UK economy recovers from major crash, grows at slow pace: ONS

Britain’s economy recovered half of its COVID-19 crash by the end of July, helped by pubs and restaurants reopening from lockdown, but the bounce-back is expected to slow as job losses mount and Brexit tensions rise.

After shrinking by a record 20% in the second quarter, output expanded by 6.6% in July, slower than June’s monthly rate, the Office for National Statistics (ONS) said on Friday. Economists polled by Reuters had expected growth of 6.7%.

Finance Minister Rishi Sunak welcomed the gross domestic product (GDP) figures but added that people were rightly worried about the coming months.

The economy remains 12% smaller than its level in February, before the pandemic hit Britain.

“July was probably the last of the big step-ups in activity and a full recovery probably won’t be achieved until early 2022,” Thomas Pugh, an economist with Capital Economics, said.

In response, the Bank of England (BoE) was likely to ramp up its bond-buying stimulus programme by a third, or 250 billion pounds ($320 billion), Pugh said.

Britain’s economy suffered the sharpest second-quarter fall of any Group of Seven nation in the April-June period.

Hopes for a swift rebound have faded as businesses struggle to cope with social distancing rules and many people remain reluctant to travel on public transport or go to crowded places.

Tensions between London and Brussels over a post-Brexit trade deal are also mounting.

Furthermore, unemployment is expected to rise sharply because Sunak has ruled out extending his coronavirus job retention scheme which is due to expire at the end of October.

Parliament’s Treasury Committee urged Sunak to “carefully consider” a targeted extension of the scheme and other support measures, a call echoed by the head of a major employers group.

Carolyn Fairbairn, director general of the Confederation of British Industry said she was in “deep conversation” with the government about a more selective version of the job subsidies scheme to avoid long-term job losses.

“We need to make sure that other countries, for example Germany, France, Australia, others who have put in place schemes like this, don’t steal a march on our economy at this time,” she told Sky News.

The pound fell slightly against the dollar as Friday’s data showed output in Britain’s dominant services sector was a bit weaker than expected. Growth in the much smaller manufacturing and construction sectors exceeded forecasts.

Complicating the outlook, Brexit risks have resurfaced.

The European Union (EU) told Britain on Thursday it should scrap a plan to breach their divorce treaty, but Prime Minister Boris Johnson’s government refused and pressed ahead with a draft law that could sink four years of talks.

“We are far from out of the woods yet,” Tom Stevenson, Investment Director, Personal Investing, at Fidelity International said, pointing to rising COVID-19 infections, new rules on social gatherings and the end of the furlough scheme.

Meanwhile, Britain secured its first big post-Brexit trade deal on Friday, an agreement with Japan which it hailed as “historic” as it struggles to agree on trade with its closest trading partners in the European Union.

Since formally leaving the EU in January, Britain has focused on negotiating new trade deals with countries around the world although experts say they are unlikely to replace exports lost to the EU if a deal cannot be reached with Brussels.

“This is a historic moment for the UK and Japan as our first major post-Brexit trade deal,” British trade minister Liz Truss said.

“The agreement we have negotiated - in record time and in challenging circumstances - goes far beyond the existing EU deal, as it secures new wins for British businesses in our great manufacturing, food and drink, and tech industries.”

The deal had been widely seen as one the easiest within reach for London, based largely on the EU-Japan agreement, which covers Britain until the end of December, when a Brexit transition period ends.

Other negotiations, especially with the United States, have progressed more slowly.

Japanese Foreign Minister Toshimitsu Motegi said the talks had been difficult “but we managed to reach an agreement in principle with extraordinary speed, in just three months”.

He said Japan was aiming for the deal - which would help Japanese manufacturers of train equipment and car components - to come into force on Jan. 1. Japan has used Britain as a pro-business gateway into the rest of the EU but some Japanese politicians have expressed concerns that a so-called no-deal Brexit might affect this.

Reuters