Britain appears to be on course to enjoy a record-breaking economic recovery in the third quarter, fuelled by consumers who are spending again after the coronavirus lockdown and a planned reopening of schools.

Although the UK economy has been hit hard during the pandemic — it recorded the sharpest fall in gross domestic product in the second quarter compared with the last three months of 2019 of any G7 nation — new data on spending suggest many Britons are splashing the cash once more.

Total consumer spending — including leisure — during the first two weeks of August exceeded the same period one year earlier, according to figures from Fable Data, a consultancy.

This is the first time there has been annual growth in spending since the lockdown was introduced in March. A new average of forecasts by City of London economists suggests that GDP is set to rise 14.3 per cent in the third quarter, reversing 55 per cent of the 20.4 per cent drop in output in the three months to June 30.

The predicted GDP growth for the three months to September 30 would be a record, with economists’ forecasts showing the UK likely to move from the bottom of the G7 performance table in the second quarter to the top in the third.


But the trajectory of the economy after this bounce is much more difficult to predict, said independent forecasters, with a lot depending on the spread of Covid-19, the quantum of social distancing measures, and whether consumers rein in their spending amid rising unemployment and a possible second wave of infections. These factors are heavily interlinked, added the economists.

Consumer spending initially recovered relatively slowly in the UK compared to elsewhere in Europe. The shutdown of most shops, restaurants and pubs had to be kept in place longer to counter higher infection rates in Britain, but the relaxation of restrictions in June and July has brought a big change in spending patterns.

Retail sales in July were up 3.6 per cent from June, and 1.4 per cent higher than one year earlier, according to figures published by the Office for National Statistics on Friday. In the first two weeks of August, consumer spending, including leisure, was about 7 per cent higher than during the same period one year earlier, said Fable Data, which collates information across many different forms of electronic payment.

More meals have been bought in pubs and restaurants due to the government’s “eat out to help out” discount scheme that runs through August, said Avinash Srinivasan, analyst at Fable Data. “We have clearly seen an improvement [in total spending] over the past month,” he added.


Car sales in July were 11.3 per cent higher than a year earlier, according to the Society of Motor Manufacturers and Traders, indicating a level of pent-up demand for big-ticket items that is expected to persist well into the third quarter.

While the easing of lockdown restrictions has prompted a sharp rise in consumer spending, third-quarter GDP should also be boosted by the proposed reopening of schools across much of the UK in September. Education is a significant contributor to output: after schools closed towards the end of March, the sector’s real output fell 34 per cent in the second quarter, contributing 1.9 percentage points to the 20.4 per cent decline in GDP.

The ONS indicated that accounting for the school holidays is a big challenge in GDP data, but its emerging view was that the sector’s lost output from the second quarter should be reversed in the July and August figures for output. This is considerably earlier than when most schools reopen, but it reflects seasonal adjustments by the ONS to the GDP data. These adjustments are expected to boost the monthly GDP growth figures for July and August by about 2.5 percentage points.

Bounce back

Jonathan Portes, professor of economics at King’s College London, said: “One key reason the UK’s economic performance appeared worse than other countries is that the ONS has done a better job of estimating the fall in education outputs in the second quarter. That means output will automatically bounce back.”

GDP growth in the third quarter could also potentially benefit from a rebound in the health sector. It shrank in the second quarter, partly reflecting how hospitals cancelled routine operations to focus on treatment of Covid-19 patients. But the scale of the boost is unclear, and some economists think that the ONS overestimated the decline in output in the education and health sectors in the second quarter.

Andrew Sentance, adviser to Cambridge Econometrics, a consultancy, said: “The ONS has not allowed for the fact that activities have had to be adapted to changing circumstances. So the [statisticians] have grossly over-egged the fall in output in the second quarter.” The July and August GDP figures, released in September and October, could well provide some relief for the government, currently reeling from the secondary school results fiasco in England.


As Bank of England chief economist Andy Haldane has said repeatedly, GDP data containing better economic news might encourage more consumers to spend. Mr Haldane wrote this month that it was “important that good economic news is not drowned out by the bad and the ugly . . . [because] boosting confidence about our financial future would reap its own economic reward”.

But the anticipated big rebound in third-quarter GDP will not be sufficient to resolve lingering doubts about Britain’s economic strength. Several factors risk holding back the recovery, led by the wind down of the government’s furlough scheme and the fact many business activities are not fully viable while the virus persists.

Samuel Tombs, economist at Pantheon Macroeconomics, said that Britain’s long-term economic recovery will be much more difficult after a stunning third quarter. “The economy’s high reliance on consumer services and the impending withdrawal of government support for the labour market suggests that the level of GDP will track a lower path than in most other economies going forwards,” he added.

(This article first appeared in the Financial Times, August 2020)

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