Start of the recovery? UK economy grew 1.8 per cent in May - Money

Shares slid today as grim economic figures showed the UK’s recovery from lockdown could be slower than hoped.

Official figures showed GDP grew by 1.8 per cent in May – but it is still nearly a quarter lower than before the draconian coronavirus restrictions were imposed.

The rise was also far smaller than some economists had expected after huge plunges in March and April.

The figures added to gloom on the stock markets, which had already been spooked by falls in the US overnight, raising concerns that the bounce back from the worst recession in 300 years could be even more painful than anticipated.

Fears are mounting about mass unemployment, as stricken retailers and hospitality businesses lay off huge numbers of jobs.

Jonathan Athow, deputy national statistician at the Office for National Statistics (ONS), said of the May economy figures: ‘Manufacturing and house-building showed signs of recovery as some businesses saw staff return to work.

‘Despite this, the economy was still a quarter smaller in May than in February, before the full effects of the pandemic struck.

Official figures showed GDP grew by 1.8 per cent in May, although it is still nearly a quarter lower than before the draconian coronavirus restrictions were imposed. In this chart 100 represents the size of the economy in 2016

GDP was down 19.1 per cent between March and May – dwarfing the falls in the credit crunch

FTSE slides amid US fears and UK’s poor GDP figures

Shares slid today amid fears over the US recovery and poor UK GDP figures.

The FTSE 100 index was down nearly 1 per cent soon after trading opened.

A dip was already expected before the economic figures were released in the UK.

However, the wear 1.8 per cent growth recorded in May added to nerves over the potential for lockdown in California and activity in the States, which had significantly hit the Dow and Nasdaq overnight.

‘In the important services sector we saw some pick-up in retail, which saw record online sales.

‘However, with lockdown restrictions remaining in place, many other services remained in the doldrums, with a number of areas seeing further declines.’

Economists had been predicting a rise in GDP of between three and five per cent, and the figures will raise concerns that the recovery could be lower than thought.

The loosening of lockdown was only just beginning in May, with garden centres among the sites being reopened.

All sectors of the economy grew in May except agriculture, which recorded a 6.2 per cent fall.

Manufacturing and construction saw the strongest bounce back, by 8.4 per cent and 8.2 per cent respectively. However, they were also the hardest hit in the earlier phases of the crisis.

British Chambers of Commerce economist Suren Thiru said: ‘The latest data confirms there was a modest rally in monthly UK GDP growth in May as restrictions started to ease. However, coming after unprecedented contractions in the previous two months, it does little to alter the UK’s historically downbeat growth trajectory.

‘The pick-up in output in May is more likely to reflect the partial release of pent-up demand as restrictions began to loosen, rather than evidence of a genuine recovery. While UK economic output may grow further in the short term as restrictions ease, this may dissipate as the economic scarring caused by the pandemic starts to bite, particularly as government support winds down.’

The new head of the OBR watchdog warned yesterday that the UK’s GDP could fall by 13 per cent this year as the prospect of second spike in coronavirus cases leads to further economic ‘uncertainty’.

Richard Hughes, the OBR’s prospective new chair, said the decline would be ‘twice as big’ as the initial impact of the 2008 financial crisis.

Rishi Sunak unveiled another massive bailout for the economy last week amid fears of a wave of job losses

UK cannot inflate away £2trillion debt, warns new watchdog chief

The UK can no longer rely on inflation to tackle its £2trillion debt pile, the head of the government’s watchdog has warned.

Richard Hughes, who is set to take charge of the Office for Budget Responsibility later this year said previously the ‘trick’ for politicians had been to whittle down the ‘real value’ of the country’s liabilities.

However, that will not be possible with the massive debts being racked up during the coronavirus crisis as around a third of the stock was now linked to the RPI inflation rate.

The note of caution came as Mr Hughes gave evidence to the Treasury Committee, which will sign off on his new post, yesterday.

Speaking to the Treasury Select Committee, he outlined the ‘exceptional economic shock’ the UK had suffered during the pandemic.

‘The global financial crisis saw GDP fall by around 5 per cent at its trough. So this is already twice as big as the initial impact of the 2008 financial crisis.’

Back in May, the OBR – Britain’s fiscal watchdog – predicted the GDP for the year would fall by 12.8 per cent – assuming a recovery in the second half of the year.

But Mr Hughes, who is a research associate at the Resolution Foundation think tank and an adviser to the International Monetary Fund, said the prospect of a second wave of coronavirus had ‘increased the level of uncertainty’ around the UK’s economic recovery.

He said: ‘Usually you can assume in the course of a recession that once you’ve turned the corner things are going to gradually get better. And it’s all about the pace of that recovery.

‘In this context you have divergent possibilities.’

A resurgence in the transmission of Covid-19 and future lockdowns would act as a ‘drag on the (economic) output’, while a vaccine could result in a ‘very rapid recovery of economic activity’, he said.

In June, Chancellor Rishi Sunak announced Mr Hughes as his preferred candidate for the position, replacing Robert Chote – whose term comes to an end later this year.