Hopes for V-shaped recovery fade as UK economy grows 1.8% in May - as it happened

Britain's economy has shrunk by a quarter since the pandemic began...and its fiscal watchdog fears the recovery will be slow and painful

• Latest: OBR warns recovery could take years
• Economists say recovery looks weak
• Rishi Sunak says figures show scale of challenge"
• The key charts as manufacturing recovers but services struggles
• BREAKING: UK economy grew 1.8% in May - weaker than hoped
• Coronavirus - latest updates

5.22pm BST

Time for a quick recap.

Hopes that the UK economy could achieve a rapid rebound from the Covid-19 recession have taken a knock. The latest GDP data shows that the economy only expanded by 1.8% in May, much weaker than the 5.5% growth expected.

Related: Britain's economy returns to growth more slowly than expected

Related: UK economy may not recover until end of 2022, Treasury forecaster warns

Related: Face masks 'will deter young shoppers' says JD Sports chairman

Related: Virgin Atlantic agrees 1.2bn rescue deal amid coronavirus slump

Singapore's GDP Fell 41.2% in the 2nd quarter 2020. Data @SoberLook pic.twitter.com/OUlI6sxpdd

5.02pm BST

European stock markets have closed for the day - and the weaker pound has helped the FTSE 100 to outperform continental rivals.

The blue-chip index has closed slightly higher, up three points at 6179, lifted by oil companies BT and Shell.

Related: Huawei to be stripped of role in UK's 5G network by 2027, Dowden confirms

The mood has been downbeat all day as continued health concerns and rising tensions in relation to China has weighed on stocks. Dealers are still worried about the rate at which the virus is spreading, and seeing as some restrictions are being reintroduced, that is adding to the bearish move too.

The US government has hit out against the Beijing administration in regards to its territorial claims in the South China Sea. This represents the latest development in the frosty relationship between the two largest economies in the world. China isn't on great terms with the UK either, as earlier today it was announced the British government basically banned Huawei from its 5G network.

4.47pm BST

Speaking of taxes.... The Telegraph has spotted that Chancellor Rishi Sunak has commissioned a review of capital gains tax (paid when you sell an asset).

The move could be a sign that the historically low CGT rates could be increased, to cover some of the debt increase caused by the pandemic. Here's the story.

Some big old news: 'Rishi Sunak orders review of capital gains tax amid fears of rate increase' https://t.co/r8GKMRO7Hr #tax #RishiSunak

With UK borrowing set to hit its highest level in peacetime history, Chancellor Rishi Sunak's request for a review of CGT feels like the starting pistol for a tax grab ahead of the Autumn Budget later this year.

A quick look at the numbers gives us some idea of why CGT might be in the Treasury's crosshairs. While chargeable gains subject to CGT after losses but before the annual exempt amount were 57.9 billion in 2017/18, total CGT liabilities were 8.8 billion - implying an average tax rate of just 15%.

3.46pm BST

The Financial Times's Chris Giles has written about the OBR's warning that the UK public finances are on an unsustainable path' (as flagged at 12.15pm):

He says:

Tax increases of 60bn or a return to austerity will be needed to restore the UK's public finances to stability after coronavirus, the fiscal watchdog said on Tuesday, predicting government borrowing will reach 370bn this year.

Describing the long-term public finances as clearly . . . on an unsustainable path", the Office for Budget Responsibility said that a combination of borrowing to address the consequences of Covid-19 and the government's decision to limit immigration after Brexit would increase the necessity for tax increases.

Gilt rates at 4.1%. Righto. I guess it's possible that gilt rate could also be a different number over a 50 year time horizon. But no confidence bands, yes, fine fine. pic.twitter.com/cDJEploXYn

A more equitable way to place the public finances on a sustainable footing is through progressive taxation, including taxation of wealth.

Given that government spending as a share of GDP will need to rise, higher tax shares should be a medium-term policy goal.

2.21pm BST

Back to today's GDP figures... the NIESR economic thinktank has estimated that the UK economy contract by up to 25% in the second quarter of 2020.

Having analysed May's growth report, it predicts a massive slump in Q2, and a more modest recovery in Q3, saying:

The loosening of Covid-19 restrictions has provided an impetus to kickstart the UK economy. However, the measures unveiled by the Chancellor at the Summer Statement are a poorly timed change of tack and could trigger a sharp rise in unemployment, and possibly lead to permanent long-term damage to the economy."

1.57pm BST

Newsflash: Virgin Atlantic has announced it has secured a rescue deal to recapitalise the airline.

Few could have predicted the scale of the Covid-19 crisis we have witnessed and undoubtedly, the last six months have been the toughest we have faced in our 36-year history. We have taken painful measures, but we have accomplished what many thought impossible.

The solvent recapitalisation of Virgin Atlantic will ensure that we can continue to provide vital connectivity and competition to consumers and businesses in Britain and beyond.

1.46pm BST

Just in: Average pay in the US has dropped, as America's economy is buffered by the Covid-19 pandemic.

Hourly earnings of private workers shrank by 1.2% in June compared to May, the latest inflation report shows. That may be a sign that some lower-paid employees, who suffered badly from job losses in the lockdown, have returned to work, pulling the average lower.

#UnitedStates Annual #Inflation at 0.6% https://t.co/LjdvxZ14rQ pic.twitter.com/eHvzi6cs3R

1.29pm BST

Two Wall Street banks have also revealed the impact of Covid-19 on their businesses.

Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy."

1.13pm BST

Economic confidence in Germany has taken a small knock this month.

The ZEW institute's gauge of German economic sentiment has dipped to 59.3, down from 63.4 in June - and weaker than expected.

Today's #ZEW investor confidence report suggests the recovery in #Germany will be choppy at best. $EUR@EricCulpLS reviews today's survey results here: https://t.co/87qXqsupRP pic.twitter.com/XESM0YfIRZ

12.34pm BST

Britain's weak recovery in May hasn't improved the mood in the markets today.

All the main European indices are in the red, with the Europe-wide Stoxx 600 down 1.2%.

12.15pm BST

The broad message from the OBR is clear -- Covid-19 has knocked Britain even further away from fiscal sustainability.

Unless governments take action - cutting spending, or raising taxes, or getting growth motoring - the national debt is on track to spiral steadily higher:

This and future governments will face a huge challenge in judging when and how public spending and tax policy levers should be pulled to place the public finances on a sustainable path.

11.59am BST

The economic picture is slightly brighter in the eurozone.

Industrial production across the euro area jumped by 12.4% in May, compared with April, new figures show. That shows that factories did succeed in growing their output, after the shutdown in March and April.

Hopefully those of us still expecting a (roughly) V-shaped UK recovery will only have to wait a month or two longer.

The #lockdown has typically been eased a little quicker in the euro area: industrial production there rose by 12.4% m/m in May, with retail sales up 17.8%... pic.twitter.com/5TRmiqBhEx

11.54am BST

The OBR was created a decade ago, to help guide the UK out of the shock of the 2008 financial crisis.

In today's fiscal sustainability report, the watchdog points out that Covid-19 is an even bigger blow. And that may mean governments need to rethink their tax and spending strategies:

From a fiscal risks perspective, the salient fact is that the economy has now been subject to two once-in-a-lifetime' shocks in just over a decade.

The budget deficit peaked at around 10 per cent of GDP after the financial crisis and may well top 15 per cent this year, whereas no previous post-war recession had even pushed it as high as 7 per cent of GDP.

11.06am BST

The CBI, which represents British businesses, is urging the government to resist tax rises or spending cuts to address the cost of the crisis.

Rain Newton-Smith, CBI Chief Economist, says the economy is too weak, given it faces the worst recession in 300 years.

This latest OBR analysis reflects the scale of the economic harm caused by this pandemic. We're not out of the woods yet - firms continue to struggle with cash flow and weak consumer demand. The Chancellor's Summer Statement took important action to flatten the curve of unemployment but more may be needed.

Economic recovery is the key to balancing the public finances over the longer term and the Autumn Budget is likely to be too early to make significant inroads through tax rises and public spending cuts. It will take several years for the UK economy to recover to pre-crisis levels and ensuring a jobs rich recovery must be the number one priority by supporting business to thrive."

10.59am BST

Here's Torsten Bell of Resolution Foundation on the OBR forecasts:

Big change in the @OBR_UK's new forecast: lasting economic damage from the pandemic (economy is still 3% smaller than expected by the middle of 2020s) pic.twitter.com/lc0oyXLVOj

Very sobering unemployment forecasts (bit more pessimistic than we've generally been) - 15% of furloughed workers lose their jobs = 1.3m. That leads unemployment to peak at a simply staggering 12% at the end of this year pic.twitter.com/3dU4MzZz27

These forecasts mean higher unemployment lasting all the way through to the 2024 election (IF the @OBR_UK are right about unemployment peaking at 12% this year then history supports the idea that it will take at least 5 years to get back towards pre-pandemic levels) pic.twitter.com/QC2ojWBWc8

10.53am BST

Ranko Berich, Head of Market Analysis at Monex Europe, says the OBR's three new economic scenarios are reminder that no-one knows just how well, or badly, the crisis will play out:

Sterling is trading lower this morning after May's GDP miss, which does challenge recent optimism from the Bank of England about the initial recovery from April's lows. However, while the initial speed of recovery is important for the UK economy and for sterling, the real issue is the pace of growth over the coming years, which we know very little about right now.

The stark differences between the OBR's upside and central scenarios highlights just how crucial assumptions about the level of economic scarring" is to any forecast for the economy - and how much uncertainty surrounds any economic forecast. Assuming no scarring to the labour market and consumer behavior, and a rapid re-opening of the economy, the OBR envisages GDP recovering its pre-pandemic peak as early as 2021. This is roughly in line with the Bank of England's last illustrative scenario". With moderate scarring, the OBR's central scenario does not see GDP recovering fully until 2022, more similar to the IMF's expectations for lasting damage. The bottom line is that nobody truly knows where we will be between these scenarios."

10.49am BST

Duncan Weldon of The Economist reckons we're looking at a square root-shaped recovery.

https://t.co/Y1r9UurogE The OBR upside scenario is a V. Their central scenario is a square root symbol. pic.twitter.com/QE1VDLMgZC

10.37am BST

Ed Conway of Sky News reckons the V-shaped recovery is toast:

Was today the day the dream of a V-shaped recovery truly died?
First the @ONS said growth didn't rebound as much as hoped in May.
Now the @OBR_UK paints a central scenario showing we won't be back to 2019 levels of GDP til late 2022. And may NEVER return to the pre-COVID GDP path pic.twitter.com/J4ZXjNzRLG

10.31am BST

The UK is facing a serious unemployment crisis if the economy doesn't recover fast from the Covid-10 shock.

Under the Office for Budget Responsibility's new central scenario, the jobless rate peaks at nearly 12% at the end of this year - up from below 4% at the start of 2020. That would match the worst levels seen in the 1980s recession (see chart below).

Unless the Government takes urgent action, the UK's unemployment crisis is going to get much worse.

The Chancellor must now listen to calls from Labour, business and trade unions and make the Job Retention Scheme live up to its name. Instead of withdrawing support across the piece, he must target it to sectors where it's needed most.

10.18am BST

The Covid-19 crisis is likely to drive Britain's national debt over 100% of GDP, for the first time since the 1960s, the OBR's new fiscal analysis show.

That's because the public finances has suffered a double blow -- tax takings will be 133bn lower due to the weak economy, while spending will jump by 135bn due to efforts to cushion the impact of the pandemic.

Higher cash borrowing and a smaller economy push public sector net debt (PSND) above 100 per cent of GDP for the first time since the early 1960s in all years of the [central] scenario.

9.55am BST

The Office for Budget Responsibility doesn't believe a V-shaped recovery is very likely either.

Its new central scenario is that the UK economy won't return to its pre-crisis levels until the end of 2022. In other words, it would take more than two years to recover the output lost in March and April.

9.45am BST

Newsflash: The UK economy is on track for its worst year in three centuries, and its biggest ever budget deficit in peacetime.

That's according to the Office for Budget Responsibility, Britain's independent fiscal watchdog.

The coronavirus outbreak and the public health measures taken to contain it have delivered one of the largest ever shocks to the UK economy and public finances. Our three medium-term scenarios (upside, central and downside) see the largest decline in annual GDP for 300 years this year, accompanied by an unprecedented peacetime rise in the budget deficit to between 13 and 21 per cent of GDP, and debt rising above 100 per cent of GDP in all but the upside scenario.

The pandemic has worsened the baseline against which existing long-term pressures on fiscal sustainability will be felt, and has materially altered our assessment of future fiscal risks.

9.37am BST

One of the messages from today GDP report is that Britain's recovery is uneven - with manufacturing growing 8%, but services barely expanding at all.

Economics journalist Paul Mason says this shows the need for targeted' support, to help struggling companies keep workers on.

2/ The sector story is crucial. This is why we need a targeted extension of furlough... pic.twitter.com/hf4FpZwr0Y

3/ But all this is meaningless until we know if there's a second wave of the virus. This slump took place DESPITE a massive fiscal/ monetary stimulus. OECD says, if there's a double hit, GDP will slump 21% in the three months to Xmas...

9.23am BST

The pound has lost ground against the US dollar and the euro this morning.

Sterling is down almost half a cent against the dollar at $1.251, and a third of a eurocent at 1.1037, as traders digest the news that Britain's economy grew by less than hoped in May.

The UK is already seeing what a non-V recovery looks like.

GDP growth rebounded 1.8% in May, which was well short of the 5.5% expected. In the three months to May, the economy contracted by 19.1%. Some of the numbers are truly horrendous and it's hard to see how the economy can deliver the +20% rebound required to get back to 2019 with confidence sapped like it is and unemployment set to rise sharply

8.59am BST

Melanie Baker, senior economist at Royal London Asset Management says the UK government should be very wary of withdrawing its stimulus measures:

This morning's data shows that the economy needs ongoing policy support; support measures already in place should be withdrawn only very cautiously.

The early stage recovery in the UK was weaker than expected, but this is unlikely to be the final word on what happened to the economy in May, with the ONS citing more uncertainty than usual around the GDP estimates."

8.56am BST

Hopes that the UK economy could achieve a rapid, or V-shaped, recovery from the crisis have taken a knock today.

While 1.8% growth in May isn't exactly unwelcome, it's mediocre following the 20.3% cratering Britain suffered in April.

The bounce-back from COVID-19 has got off to a disappointing start. The pace of activity will have picked up sharply in June as the easing of the lockdown got underway. The chances of a quick return to normal, of the famed V-shaped recovery, are falling.

It is likely to take years, not months, to repair the damage to the economy done by COVID-19."

Hopes of a V-shaped recovery are fading fast, and I suspect we're looking at something resembling far more of a W' - a series of improvements and relapses, before a proper recovery takes hold.

Pent-up demand amongst consumers suggests that we may see some spikes in activity as shops and restaurants re-open, flights resume, and workers continue their gradual return to the office. However, this upwards trajectory may be flatter and the recovery take longer than we hoped. It is one thing opening up, another persuading consumers to return to their old ways.

The loosening of #Covid19 restrictions has provided an impetus to kickstart the UK #economy. However, the measures recently unveiled by the #Chancellor to help boost the economy are poorly timed and could in fact trigger a sharp rise in #unemployment...

2/3

The economy is still at incredibly low levels of production - it's just less bad than the reductions we saw in April.....

The message from May's data appears to be that the economy is currently operating at a very low level of output, but some sectors are starting to increase output from what was observed in April. Looking ahead we would expect this trend to continue, but the big question will be - how rapidly can the economy bounce back?"

8.46am BST

Economist Rupert Seggins has also broken down today's GDP report by sector, to create this neat chart:

Biggest monthly growth was in wholesale & retail (12.9%m/m), with growth in manufacturing (8.4%m/m) and construction (8.2%m/m). Biggest drags from Info & Comms (-2.8%m/m) & professional services (-3.8%m/m) pic.twitter.com/Zyox7uCMI5

8.40am BST

Rob Kent-Smith, head of national accounts at the Office for National Statistics, has highlighted the key points in today's GDP report:

1/6 Thread on today's UK GDP figures (just published). GDP in the three months to May fell by 19.1% and increased by 1.8% in the month of May. In context, UK economy was nearly a quarter smaller in May than Feb. pic.twitter.com/oOni9m2IdB

2/6 Focusing on May, there were marked differences in the performance of the headline sectors; Services +0.9%, Production +6.0%, Manufacturing +8.4% and Construction +8.2%.

3/6 Most areas of manufacturing saw some growth pic.twitter.com/VK5QuoyffV

4/6 Construction growth was helped by private housebuilding which grew by 21.4% pic.twitter.com/zMqWKs7L7X

5/6 In services growth was particularly strong in the retail sector which grew 12.0%, in other areas the picture was much more muted, with a number of areas seeing further falls. pic.twitter.com/KnKiXGVJEC

8.39am BST

Just to clarify one point from earlier -- it was the retail sector (including car sales) which posted the best growth across the service sector in May.

That's partly because the government allowed DIY stores and garden centres to reopen in May.

In May 2020, the services sector grew by 0.9%, following a fall of 18.9% in April 2020.

The largest positive contributor to this increase was the wholesale, retail and repair of motor vehicles sub-sector, in particular the retail industry which grew 12.0% as a result of strong growth in non-food stores and a record proportion of online sales

8.27am BST

Here's my colleague Richard Partington on today's GDP report:

The British economy returned to growth more slowly than expected in May following the sharpest plunge on record a month earlier, triggered by the coronavirus pandemic.

The Office for National Statistics said gross domestic product (GDP) grew by 1.8% in May as the economy staged a modest recovery from April, when GDP crashed by a fifth during the first full month of lockdown.

Related: Britain's economy returns to growth more slowly than expected

8.27am BST

The UK isn't officially in recession yet, although frankly it's only a matter of time.

Next month's GDP report, for June, will surely show that the economy contracted extremely sharply in the second quarter of 2020 (having shrunk by a fifth in April alone). We already know UK GDP shrank by around 2.2% in Q1 - the worst in 40 years.

Singapore slumps into recession with record 41.2% GDP plunge#Singapore #recession #GDPhttps://t.co/zKsf9i5jEz pic.twitter.com/99ItyX0mfk

8.15am BST

Today's GDP report is packed with charts showing how the economy cratered in March and April, before returning dizzily to modest growth in May.

This one shows how construction took the worst hit, with most building sites shutting down completely.

8.03am BST

Robert Alster, head of investment services at wealth manager Close Brothers Asset Management, says the modest recovery in May is a disappointment:

For the economy to only grow by 1.8 percent in May, the month where lockdown started to ease, points to choppy waters ahead. The Government will be hoping that we've already reached economic rock bottom' and that these latest figures are the start of a consistent, upward rebound.

While GDP has improved slightly, it's worth noting that the economy is still 25% smaller than it was in February, before the pandemic took hold. Jobs, both on the high street and in industry, are disappearing at an alarming rate and there are no signs yet of any real improvement in the UK labour market.

7.57am BST

Here's the chancellor of the Exchequer, Rishi Sunak, on today's GDP figures:

Today's figures underline the scale of the challenge we face. I know people are worried about the security of their jobs and incomes.

That's why I set out our Plan for Jobs last week, following the PM's new deal for Britain, to protect, support and create jobs as we safely reopen our economy."

7.52am BST

James Smith, Research Director of the Resolution Foundation, says the recovery from the Covid-19 slump has begun.

But its strength will depend on two factors -- how people behave, and if a Covid-19 vaccine is successfully developed.

Today's data tells us that the UK economy started to recover as lockdown restrictions were eased in May. But what would normally be seen as strong growth in May of 1.8 per cent mainly reflects the depth of the lockdown's economic damage, rather than a swift or V-shaped recovery. The economy was still just three-quarters of the size it was as recently as February.

While we should expect strong immediate bounce backs in many sectors, such as retail which grew by 12 per cent in May, what recovery we actually see from here will depend on how people respond to the easing of restrictions and, crucially, the course of the public health crisis. Ultimately, the UK economy is unlikely to return to close to its pre-covid economic path until a vaccine or treatment is found."

7.48am BST

City economists are disappointed that the UK didn't grow faster in May.

Economist Rupert Seggins points out that the economy has still lost over 17 years of growth:

UK GDP up 1.8%m/m in May, less than the consensus expectation of 5.5%m/m. GDP 25% down on February's level. Same GDP level as December 2002. pic.twitter.com/X9BUxYoaYz

May's run of GDP, industrial production and services sector activity confirms that it's easier to fall down a lift shaft than walk up a flight of stairs and the ongoing economic recovery will need many more months before any vague sense of normality is restored.

There are few signs that the UK economy is close to anything resembling a v-shaped recovery although we expect that June's data will be better than May's which have shown little more than a false dawn."

Very limited lifting of lockdown meant GDP was up just 1.8% in May. Manufacturing and construction rebounded. Services subdued. It's a long way back from here.

Whilst monthly UK GDP data is volatile, May's rebound of just 1.8%MoM (with output still -25% since Feb) is disappointing. The trajectory of recovery is all about labour market scarring & public health confidence - the early @ons output data suggests both face a prolonged hit

7.43am BST

Over the last quarter, the services sector fell by 18.9% while production shrank by 15.5%, the ONS says.

That includes a 37.8% slump in education output due to school closures, and a 31.4% drop in health output following reduced activity in elective operations and fewer accident and emergency visits"

7.35am BST

Britain's manufacturers drove growth in May, boosting their output by 8.4% as factories emerged from the lockdown.

The construction sector grew by 8.2% -- having contracted by a whopping 40% in April.

7.26am BST

Although the UK economy is growing again, it's only taken the first small step towards repairing the damage of the last quarter - as this chart shows:

7.12am BST

Good morning. Britain's economy has returned to growth for the first time since the Covid-19 pandemic forced the country to lock down.

But it's still a quarter smaller than before the crisis began.
UK GDP rose by 1.8% in May, according to data just released by the latest estimate from the Office for National Statistics. That follows the record slump of 20.3% in April, and a 6.9% decline in March.

Manufacturing and house building showed signs of recovery as some businesses saw staff return to work. Despite this, the economy was still a quarter smaller in May than in February, before the full effects of the pandemic struck.

In the important services sector, we saw some pickup in retail, which saw record online sales. However, with lockdown restrictions remaining in place, many other services remained in the doldrums, with a number of areas seeing further declines."

European Opening Calls:#FTSE 6100 -1.23%#DAX 12575 -1.76%#CAC 4972 -1.68%#AEX 571 -1.38%#MIB 19706 -1.49%#IBEX 7336 -1.23%#OMX 1719 -1.34%#STOXX 3293 -1.70%#IGOpeningCall

Quite an intra-session reversal for #US #stocks
After significant early gains, the #Dow ended flat while the S&P and #NASDAQ closed 0.9-2.1% lower.
These reversals pale in comparison to @Tesla's: 20 percentage point turnaround as the early 16% surge gave way to a 3% decline#tsla pic.twitter.com/sCXyU7pKCT

Tesla in half a day's trading lost $50bn in market cap, having been sharply up recently. To put that in context, just the *change* in market value = roughly total market cap of PSA (Peugeot), FCA (Fiat), Nissan and Renault combined.