The UK is heading for a rapid “V-shaped” recovery as consumers celebrate the end of lockdown with a spending spree, the Bank of England’s chief economist Andy Haldane has said.
Consumer spending data, surveys of confidence and business activity all point to a smaller crunch and speedier bounce back than previously thought possible, Mr Haldane claimed in a speech.
He now believes the country is recovering even more quickly than under a previous Bank of England scenario which set out a return to near-normal output by the end of 2020 – and was derided at the time for being too rosy.
Mr Haldane said that a flurry of early data suggests the Bank may in fact have been too pessimistic.
He said: “Generally speaking, these indicators suggest the recovery in both the UK and global economies has come somewhat sooner, and has been materially faster, than in the [Bank of England’s May] scenario – indeed, sooner and faster than any other mainstream macroeconomic forecaster.
“There is a debate about which letter of the alphabet will best describe the path of the economy, with some scepticism about the V-shaped scenario path in the Bank’s May Monetary Policy Report. It is early days, but my reading of the evidence is so far, so V.”
After reaching a trough in April, some parts of consumer spending are already back to pre-pandemic levels.
The strength of recovery since the lockdown started lifting, with stronger sales of cars, houses and household goods, “suggests some greater than expected degree of underlying strength in consumer spending in the UK economy,” said Mr Haldane.
He was alone on the Bank's Monetary Policy Committee in voting against an expansion of its money printing programme this this month, suggesting he is at the most optimistic end of the spectrum within Threadneedle Street.
Mr Haldane said: “The balance of evidence suggests so far the recovery is, in consumer spending at least, on pretty steady legs.”
A similar pattern is taking shape globally too, he said. Instead of falling 23pc in the second quarter as predicted, the Bank now estimates that world GDP dropped by 10pc – still a far bigger plunge than anything seen since the Second World War.
The chief economist was speaking after the Office for National Statistics revealed GDP fell faster than previously thought in the first quarter of 2020. Households slashed spending, businesses cut investment and school pupils stopped attending as the coronoavirus crisis exploded, even though lockdown was imposed for only a few days of the period.
Even NHS output fell as hospitals cleared their wards of non-Covid patients in preparation for the pandemic.
GDP fell by 2.2pc as a result – more than the 2pc previously estimated and steeper than any drop seen in the financial crisis. It is now the worst three-month period in 40 years.
In March alone GDP fell by 6.9pc, worse than the 5.8pc previously estimated and a sign of the severity of the harm inflicted by the pandemic lockdown.
A key cause of the extra drop is a much bigger fall in household consumption.
Deprived of the ability to go out and spend at the end of March and increasingly cautious about social contact even before that, families cut spending by 2.9pc on the quarter – a much bigger fall than previous estimates of a 1.6pc decline.
This contributed to a 2.3pc contraction in the services industry, which is the dominant sector of the UK economy.
Accommodation and food services crashed by more than 10pc as customers stayed away and venues were forced to close their doors.
As households cut spending by £9.5bn, their savings surged to 8.6pc of their income – up from 6.6pc previously. Samuel Tombs at Pantheon Macroeconomics expects savings to soar to a record of around 20pc in the third quarter, with the longer lockdown leaving families with no choice but to hoard cash.
Mr Haldane noted this could trigger a spending spree as the lockdown comes to an end.
Education output slumped 6pc as pupils stopped going to school, and then schools themselves shut down for all except the children of key workers.
It contributed to a 3.7pc drop in Government services in the quarter.
Despite extra spending, the state’s contribution to GDP actually fell. Education output plunged and even health and social care dropped 4.2pc, as hospitals cancelled or postponed non-coronavirus treatments and the NHS opened up capacity to deal with the pandemic.
The production industries shrank 1.5pc, driven by a drop in manufacturing. Car factory shutdowns sent production down just over 15pc in the quarter, with March’s output dropping by more than one-third on the same month a year earlier.
But pharmaceuticals output increased, so the overall fall in manufacturing was smaller than previously realised.
Construction output contracted 1.7pc.
A few industries bucked the trend. Financial services and insurance eked out modest growth of 0.4pc on the quarter, while real estate climbed 0.3pc and public administration rose by 0.2pc.