UK recovery overshadowed by inflation and new Covid variants

Our latest snapshot of key economic indicators finds unemployment falling and business activity growing

Covid variants raise questions over further restrictions easing

The number of daily new confirmed coronavirus infections has risen in the past month, fuelled by the Covid variant first detected in India – B.1.617.2. Prompting questions over the further easing of government restrictions on 21 June, the variant accounts for the majority of new cases in several locations, including Bedford, Blackburn and Wigan. The latest figures to 25 May show 2,493 people tested positive for Covid-19 across the UK, a gradual rise from 1,350 on 1 May. However, the number of patients admitted to hospital and deaths – which lag behind positive test results – has continued a gradual decline. More than 38 million people have had a first shot of a Covid-19 vaccine. More than 23 million have had a second.

Public transport use returns close to pre-pandemic levels

The number of trips taken on public transport has returned close to pre-pandemic levels in the past month, in a sign that more people are starting to leave their homes after lockdown measures were relaxed. According to Apple mobility data – which records requests made to Apple Maps for directions – bus and train journeys are just 5% below levels recorded in January 2020, as more people venture away from home and some office workers resume commuting. Walking and driving is also above pre-pandemic levels.

Stock market gains checked by inflation worries

The FTSE 100 has made modest gains over the past month amid hopes for a stronger economic recovery from Covid-19. However, fears that major central banks will have to raise interest rates to counter rapid growth in inflation have checked the progress of stock markets in recent weeks, denting the value of the blue-chip index and other leading markets around the world. The FTSE 100 has risen by about 50 points in the past month to trade at just over 7,000.

Inflation more than doubles as energy prices rise

UK inflation more than doubled to 1.5% in April amid a sharp rise in oil prices and household gas and electricity bills, the highest level since the start of the Covid-19 pandemic. Although the rate of inflation remains below the Bank of England target of 2%, and most price increases relate to a turnaround from falls last year, the latest figures fuel concern that the cost of living is on a rising trend. Threadneedle Street expects a temporary rise above-target inflation as the economy reopens, although some economists warn high inflation could remain amid heightened government support stoking demand, as well as supply constraints linked to Brexit and higher costs for raw materials.

Business activity grows at the fastest rate since the 1990s

The UK economy recorded its fastest growth in business activity for more than two decades this month as the reopening of hospitality venues indoors led to a sharp rise in consumer spending. The flash IHS Markit/Cips purchasing managers’ index, a closely watched barometer of private sector activity, jumped to 62 in May from 60.7 a month earlier. The 50 mark divides expansion from contraction, and the reading was the highest level since records began in 1998. Business confidence hit an all-time high as concerns about the pandemic continued to fade, while factory orders rose amid a resurgence in global trade. The eurozone economy also continued to grow, albeit at a slower pace. Private sector activity hit a fresh record high in the US as the world’s largest economy stages a rapid recovery. Growth has also accelerated in China.

Unemployment drops as lockdown lifts

Unemployment chart

UK employers who were getting ready for the easing of lockdown started hiring again in March, according to the latest official figures, driving down the unemployment rate for a third consecutive month. The jobless rate fell to 4.8% in the three months to the end of March from 4.9% in the three months to the end of February, amid broader signs of recovery in the jobs market as the Covid-19 vaccine gives firms confidence to take on more staff. Vacancies rose close to pre-pandemic levels in April as hospitality and non-essential shops were allowed to reopen in England and Wales. However, 4.2m jobs remained furloughed at the end of March. Economists fear job losses will mount once the scheme is made less generous in July and removed at the end of September.

Retail sales soar as non-essential shops reopen

British retail sales soared by 9.2% in April as lockdown measures were eased and non-essential shops reopened. After an almost four-month shutdown, the Office for National Statistics said there was an increase in spending across the board, with clothing and shoe shops enjoying a rise in sales of almost 70% in particular. Helped by consumers spending on physical goods while travel, hospitality and leisure only gradually reopened, overall retail sales were 10.6% higher than they were before the pandemic began to have an impact on the economy in February 2020.

Borrowing remains high despite improvement in April

Government borrowing

Britain’s economy faring better than expected during the third national lockdown helped limit government borrowing in April to £31.7bn, almost £16bn lower than in the same month a year ago when the pandemic first spread. However, the figure remained the second highest April on record, as emergency government support including the furlough scheme continued. The government used the Queen’s speech this month to say it would put the public finances back on a sustainable footing once an economic recovery is secure. But economists warn austerity would derail sustainable growth and trigger deep-seated inequalities across society.

Economy fell by less than expected during third lockdown

Businesses making plans for the easing of Covid-19 restrictions amid the rapid rollout of the coronavirus vaccine lifted GDP by 2.1% in March, helping to prevent a worse fall in economic output in the first three months of the year. The economy retreated by a better than expected 1.5% during the first quarter of 2021 despite the toughest lockdown measures since the first wave of the pandemic, as businesses and households adapted to restrictions and as activity picked up as spring approached. However, March’s GDP remains 5.9% below the levels seen in February 2020 before the pandemic struck.

House prices jump after stamp duty extension

House prices are rising at their fastest pace in five years after Rishi Sunak extended the government’s stamp duty holiday until the summer, prompting a fresh surge in buying last month. The latest snapshot from Halifax, Britain’s biggest mortgage lender, showed the average price of a UK home jumped by 1.4% in April, as buyers looked to take advantage of the tax break. The chancellor used the March budget to extend the deadline from the end of that month until the end of June, before it is gradually phased out by October.

And another thing we’ve learned this month … Consumers flood back to hospitality venues as restrictions are relaxed

another thing chart - restaurant seated diners

Spending in restaurants, pubs and cafes has surged after the reopening of hospitality venues indoors across the UK in recent weeks, in a sign of pent-up demand for eating out among lockdown weary consumers. The number of seated diners in venues across the UK has soared above pre-pandemic levels, according to figures from the online booking platform OpenTable. Diner numbers reached 45% of pre-Covid levels in the week ending 24 May, narrowly surpassing appetite recorded during “eat out to help out” last August. Helped by progress with the Covid-19 vaccine, the recovery is ahead of other comparable big economies including the US, Canada, Germany and Ireland. Figures from Barclaycard also show that spending at pubs and bars was 171% higher in the first week since reopening indoors in England and Wales compared to a week earlier, while restaurant sales were 58% higher.


Richard Partington Economics correspondent

The GuardianTramp

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