Saturday, August 15, 2020

Assessing 4 key indicators of the UK’s recovery

Slowly but surely, the British economy is beginning to open back up. It is going to be a long process, and there are no guarantees that we won’t see subsequent lockdowns if public needs demand as much. For now though, more businesses are reopening, and efforts are underway to get the economy back on track.

Frankly, we are still at too early a point in this progress to assess in detail whether or not the recovery looks promising. Some see reasons to believe that the recovery may speed up in earnest once it starts; some see a long, slow road ahead. There is no telling which side is more accurate, but what we can begin to do is assess some traditional key indicators for an economy seeking recovery.

Manufacturing output

We will start with an area in which there have been some positive indications of late. As written in June, manufacturing output increased significantly in May, up from record lows in April. In a sense this was at least somewhat predictable. There was nowhere for manufacturing to go but up, and with some manufacturers restarting their businesses, increased output was to be expected. There was good and bad news in the actual numbers though. On the one hand, the May gains made up more than half of what was lost between March and April — perhaps a more rapid and substantial bounce than some would have expected. On the other hand, output was still quite low in historical context. Manufacturing has looked positive, though not so much as to get our hopes up for an unusually quick recovery.

Household spending

Consumer spending and measured household spending can also be a clear indicator of an economy in recovery. Simply put, as people’s financial standing improves, they begin to feel more comfortable spending more, which in turn injects more money in the economy as a whole. And right now, this is one area in which we really are not seeing signs of recovery just yet. At the end of June, a quarterly drop of £9.5 billion was recorded, indicating that household spending had fallen to record lows. The silver lining is that most of that drop occurred before businesses started to reopen. It is likely that we will begin to see at least marginally more spending in July and August. For now though, this is not a positive area.

The British pound

The GBP is actually a complicated indicator in 2020, because its value is likely contending with both the recovery effort and the ongoing issues related to Brexit and the ensuing trade negotiations. In that sense it is difficult to say for certain whether or not the pound is showing strength, or even what its fluctuations might indicate. What we do know, however, is that the GBP/USD relationship remains in the pound’s favour — not a decisive finding by any means, but at least a mildly reassuring one. The dollar’s struggles and those of the U.S. economy could be helping somewhat to prop up the GBP during a time of uncertainty. That may not have much of an implication regarding recovery, though it is worth noting that it could be worse. A weaker pound would raise more questions about the overall strength of the economy.

The Housing Market

The housing market is often cited as something to watch when assessing early-stage recoveries, for similar reasons to those given regarding household spending. In our current state though, recent months’ impact on the housing market is still somewhat unclear. Essentially, the market was quite strong heading into the pandemic, and the data from the height of the lockdown has not yet been fully realized. Here too though, things could conceivably be worse. If the reopening of British society can progress smoothly, without subsequent lockdowns or significant economic issues, housing could ease back to its strong performance from earlier in the year. However, we will have to wait and see.

We cannot say just yet whether all of this adds up to a quick or slow recovery — or even a full one or an incomplete one. But these are some of the areas to watch, and at this stage there are at least some small positives to be taken from them.

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