Latest GDP Data Suggests ... The Recovery is on track ...

The ONS released the preliminary monthly estimate of GDP for the month of July. The economy continues to recover from the shock of shutdown. Businesses are returning to some semblance of normality.

Compared to prior year, output fell by just over 20% in the second quarter. We now expect output to fall by just over 10% in the third quarter and by around 5% in the final quarter of the year. (All figures in comparison with prior year).

For the year as a whole, this means output will have fallen by 10% in 2020 compared to prior year. The stage is set for a significant bounce back in 2021. If nothing else, the year on year comparisons will be so easy to beat. We now expect manufacturing output to be down by 10% in Q3. This is a 2% improvement on our earlier estimate. Construction output will also be better than expected, down by 15% in Q3 compared to our more pessimistic 20% prognosis. Bear in mind construction output slumped by 35% as the clampdown was imposed.

Retail and distribution output is expected to return to prior year levels in the second half of the year. The volume of activity is returning to normal. The shift on line continues to create problems for retail footprints and jobs on the shop floor, as we explain below.

The most vulnerable sectors to shut down, are identified in arts and entertainment, down by 35% in the third quarter. Hotels and restaurants remain the most blighted sector. Output in Q3 we now expect to be down by 60% in the third quarter and by 25% by the end of the year. The detailed numbers of our sector model, have been included in the data set below.

So what does this mean for jobs? In the worst case scenario, over 3 million could be out of work by the end of the year. This week, Andy Haldane, Chief Economist at the Bank of England warned the government against an extension of the furlough scheme.  "A necessary process of adjustment" is taking place. An extension would delay the "inevitable" shake-out of businesses hit by the pandemic, the Chief Economist explained.

Is this really the case? it is important to distinguish between structural unemployment and cyclical unemployment. The Haldane hard line is probably correct for those jobs subject to structural shift. For those sectors which are more cyclical, further support into Easter next year would be a more appropriate response. The government will have a heavy price to pay, either way ...