UK economy recovering from Covid shock, for now, as public borrowing mounts

By David Milliken, Andy Bruce and William Schomberg

LONDON (Reuters) - Britain's economic recovery from the shock of the COVID-19 pandemic has gathered pace, data showed on Friday, but government borrowing rose past the 2 trillion pound ($2.64 trillion) mark and fears of future job losses are mounting.

Retail sales rose above pre-pandemic levels in July and August's Purchasing Managers' Index data showed the fastest growth in almost seven years, beating economists' expectations in both cases.

But Britain's economy still faces a long recovery after shrinking by a record 20% in the second quarter, the largest decline of any big country, and businesses are shedding jobs, raising questions over how long consumers will continue their spending spree.

"This uptick in retail consumption may help ease concerns over the fragility of the UK economy -- but not for long," said Alistair McQueen, head of savings and retirement at insurance company Aviva.

Britain entered lockdown in late March and shops in England only fully reopened on June 15. Bars and restaurants followed suit on July 4.

Retail sales in July were 1.4% above year-ago levels and 3.0% above their level before the pandemic, according to figures from the Office for National Statistics.

August's preliminary composite PMI, which covers most of Britain's private sector other than retail, rose to its highest level since October 2013, after striking a record low in April.

But a growing proportion of employers said they planned to shed jobs and were making staff redundant rather than bringing them back from a government-subsidised furlough scheme that expires in October.

"Scarring from the pandemic and lingering doubts about the sustainability of recovery resulted in a need to cut overheads," said Tim Moore, economics director at IHS Markit, which publishes the PMI data.

PMI surveys for the euro zone -- where countries exited lockdown earlier than Britain -- showed the recovery stuttering, suggesting the impact of pent-up demand that drove an expansion in July is already fading.

 

JOB LOSSES

Even within retail, different businesses have had contrasting fortunes.

Grocery sales are 3% up on the year and online sales are 50% higher than before the pandemic, while sales volumes at clothing and footwear stores are 25% lower than last year.

Stores such as Marks & Spencer , Boots , John Lewis [JLPLC.UL], Dixons Carphone and WH Smith have announced plans for thousands of job cuts.

The government has spent more than 35 billion pounds so far on its job support scheme, the largest single measure to tackle the economic impact of the pandemic, but has only offered relatively small incentives for businesses to bring staff back.

The Bank of England forecasts unemployment will reach 7.5% by year-end, almost double its most recent reading.

Friday's data laid bare the impact of increased public spending and a slide in tax revenues on the public finances.

Government borrowing so far this financial year is 150.5 billion pounds, almost seven times higher than in the same period in 2019 though below the 178.8 billion pounds which government budget forecasters predicted last month.

Over the course of this year, the Office for Budget Responsibility expects the budget deficit to reach 322 billion pounds or 16% of GDP.

Public sector net debt exceeded 2 trillion pounds in July for the first time, and is its highest since 1961 as a share of gross domestic product.

Finance minister Rishi Sunak has indicated that some taxes will need to rise over the medium term.

"Today's figures are a stark reminder that we must return our public finances to a sustainable footing over time, which will require taking difficult decisions," he said.

 

(Additional reporting by Andy Bruce; Editing by Catherine Evans)