The rise in the UK Economic Sentiment Indicator in June suggests that the economy is continuing to recover after its nadir in April. But firms and households are becoming more downbeat on the outlook for employment, which could start to hold back the recovery.
Output recovering but employment intentions wavering
- The rise in the UK Economic Sentiment Indicator (ESI) in June suggests that the economy is continuing to recover after its nadir in April. But firms and households are becoming more downbeat on the outlook for employment, which could start to hold back the recovery.
- The rise in the ESI from 61.7 to 65.2 (Capital Economics: 65.0) leaves the indicator consistent with GDP falling by around 4.0% y/y in June. However, we already know that GDP fell by 24.5% y/y in April, when the ESI was pointing to a drop of just 5.0%. So, like other surveys, the ESI has done a pretty poor job in predicting the depth of the recession. (See Chart 1.)
- As such, the more interesting aspect of the survey is what it tells us about firms’ and households’ expectations, which may be an early guide to whether consumer and business caution in the aftermath of the epidemic will hold back the recovery. Unsurprisingly, firms reported very weak activity over the past few months. (See Chart 2.) But there has been steady upward trend across all sectors in the balance of firms expecting activity to pick up. And households are becoming less pessimistic about the outlook for their personal finances. Indeed, if anything, consumers’ confidence about their own finances should have translated into a further rebound in retail sales in June. (See Chart 3.)
- However, it was not all good news. The drop in the employment expectations balances in the retail, household and industrial sectors echoes other indicators suggesting that the labour market is lagging behind the rest of the economy in the recovery. (See Chart 4.) Indeed, our primary concern is that a further rise in unemployment will reduce the ability of households to spend and hold back the economy. That is one reason why we think that the recovery underway may well peter out in the second half of the year and why we expect the MPC to announce a further £250bn of QE over the next few years. (See here.)
Chart 1: UK ESI & GDP
Chart 2: Current & Expected Demand
Chart 3: Consumers’ Finances & Retail Sales
Chart 4: Employment Expectations
Sources: Refinitiv, European Commission, Capital Economics
Thomas Pugh, UK Economist, +44 7568 378 042, email@example.com