UK economic growth slowed to 0.8% in May – as it happened

Graeme Wearden

from on 2021-07-09 16:18 (#5M0WZ)

Rolling coverage of the latest economic and financial news

China cuts RRR rate as slowdown looms
UK economy grew by 0.8% in May, slower than expected
Reopening boosted hospitality sector...
...but UK carmakers hit by chip shortage
Industrial production lifted by energy demand...construction output fell
Economy still 3.1% smaller than before pandemic

5.18pm BST

And finally... Europe's stock markets have recorded a strong bounceback from their losses yesterday.

The FTSE 100 index has posted its biggest one-day rise in two months, after its worst fall in three weeks.

The vicious move in bonds yesterday is imho very justified by peaking global credit impulse and the more hawkish Fed reaction function, but it also has to do with a weird thing called convexity hedging.
A short thread
1/4

If you own mortgages or MBS on your balance sheet and you are funded with deposits, you are subject to negative convexity. When yields fall, people repay their existing mortgages to refinance at lower yields hence the duration of the asset side of their B/S shrinks.
2/4

On the liabilities side, the deposits don't show a strong enough offsetting convexity pattern. They are stickier to adjust and in some jurisdictions, deposits are even floored at 0%.
So, all of a sudden you find yourself with a shorter duration on a net basis. What to do?
3/4

The easiest way to repair that situation is to get exposed to more duration on the asset side.
So you buy bonds or receive fixed rate swaps.
As everybody is doing the same at the same time, this can exacerbate downward yield moves.
*class dismissed*

5.12pm BST

Today's UK trade data showed that British goods exports to the European Union rose to their highest since October 2019 in May, after a slump at the start of the year.

But as flagged before, imports have not shown the same recovery.

Little detail yet, but today's UK trade data show further recovery in #exports to EU in May after rocky start at end of transition period in January.

In contrast, UK #imports from EU are still relatively weak.

Not obvious why, but here are two possible explanations...

(1/2) pic.twitter.com/CpcmwlNu2A

1. #Brexit has led UK consumers and firms to buy more from rest of world instead of EU (see chart below), or from home producers

2. There may be other *non-Brexit* factors, e.g. global problems in car sector (UK trade in cars is mainly with EU)

Largely guesswork though! (2/2) pic.twitter.com/rtOT1fW9DV

5.07pm BST

With excitement building ahead of Sunday's Euro 2020 climax, a lot has changed since England's men last contested an international football final.

NatWest chief economist Seb Burnside has highlighted how wages and prices have both risen over the last 55 years - with houses, and beer, notably pricier.

4.19pm BST

German carmaker Volkswagen has warned that the bottleneck in semiconductors has shifted into the second half of this year... as its profits rise above pre-pandemic levels in the first six months.

The deliveries to customers of the Volkswagen Group continued to recover strongly in the first half of the current year, leading to a very strong Group turnover as well as a very high operating profit.

Also the reported Automotive net cash position showed a very positive development. The bottleneck in semiconductors has shifted and will rather impact us in H2.

Strong first half 2021 for us

Operating profit of around 11 billion Euros
Reported Automotive net cash flow of around 10 billion Euros

Click here for more

3.37pm BST

One of the big stories of the week has been China's crackdown on its tech sector, notably Didi, just days after it floated in New York.

Our China affairs correspondent Vincent Ni has looked into Beijing's fight against tech's barbaric growth', and reports:

Over the past two years, multiple state agencies - from the financial regulators to the new market watchdog and the cybersecurity authorities - have been drafting new rules to regulate China's booming tech sector, long before Didi's New York listing. Earlier this year, the People's Bank of China proposed tightening rules for businesses that collect personal and corporate credit data, as it vowed to improve data privacy protection.

But as well as protecting consumers, this is also about control - control of what companies do and control of the massive amounts of data they collect about their users. It is an issue that has become even more urgent today as tensions between the US and China deepen.

3.17pm BST

Over in Canada, job creation has picked up after Covid-19 restrictions were eased.

Statistics Canada reports the economy added 230,700 jobs in June, as restrictions put in place to slow the pandemic were rolled back in many parts of the country.

Compared with the May reference week, public health restrictions had been significantly eased in several jurisdictions by the end of the June reference week.

Most indoor and outdoor dining, recreation and cultural activities, retail shopping, and personal care services had resumed or continued in eight provinces, with varying degrees of capacity restrictions.

231,000 jobs in June, pushing jobless rate down to 7.8%

Canada's economy added 231,000 jobs last month, more than offsetting the losses seen in the previous two months as COVID-19 restrictions eased & businesses started hiring again.https://t.co/ogtKWmJ3tO

@JustinTrudeau pic.twitter.com/BvCbCwiUax

2.51pm BST

In the markets, Wall Street has opened higher, as investors recover their nerve after Thursday's wobble.

Recovery stocks are back in demand, pushing the Dow Jones industrial average up by 310 points or 0.9% in early trading, to 34,732.

U.S. stocks open higher https://t.co/oc5wlKJ997 pic.twitter.com/AllOZ16uUy

2.32pm BST

Back on GDP.... the NIESR economic research institute have forecast that the UK economy will have grown by 0.9% in June, continuing the slowdown.

That would be slightly faster than May, but still weaker than in April and March during the initial easing of lockdown.

OUT NOW - Our latest #GDP Tracker suggests growth in June of 0.9%, and 4.8% for the 2nd quarter of 2021 overall, and forecast growth of 1.9% in the third quarter.

But with #COVID19 cases rising again, & consumer caution evident, the lifting of..

1/2https://t.co/r0HlI10M1C

further restrictions on July 19th risk boosting the #economy in the short term at the expense of a longer lasting & more sustainable recovery. Much will depend on the roll-out & efficacy of vaccines against the #DeltaVariant

Read here in full

2/2https://t.co/r0HlI10M1C

1.58pm BST

Although UK trade with the EU picked up in May, there could be more disruption this summer if British holidaymakers head abroad for holidays.

The head of the port of Dover has told Reuters that an increase in traffic will cause pressure, due to the extra paperwork at the border for freight at the border -- highlighting the need for more investment at the site.

A pre-Brexit trade rush led to 20-mile queues, but Doug Bannister, CEO of the Port of Dover, told Reuters the site had so far managed the switch to customs checks well, after Britain left the EU trade bloc at the end of 2020.

That's because we haven't seen the demand for tourists coming from our facilities, as we would normally expect to see," he said on a bright sunny day as a ferry departed for Calais.

EXCLUSIVE Dover warns of Brexit trade disruption as tourists hit Europe https://t.co/1aoBzgRqnt pic.twitter.com/nehGXWtJ73

1.17pm BST

UK goods exports to the European Union rose in May, while imports from the EU remain much lower than before the Brexit deal came in.

That's according to the latest trade data, released by the Office for National Statistics, after a processing error caused a delay from 7am.

Total underlying exports of goods to the EU grew 1.0bn (8.0%) in May while the total underlying imports of goods from the EU increased 0.1bn (0.8%) https://t.co/e14sH9qlH5

Latest trade data show UK exports to EU revised up, imports revised down

UK on course to export more to EU in 2021 than 2020 when UK was in Customs Union & Single Market

UK-EU goods deficit likely to fall to ~65bn in 2021 from 82.5bn in 2020.#Brexit https://t.co/xJiZEGyXsb. pic.twitter.com/2t4DgPdpzv

UK imports from EU have collapsed in 2021 relative to non-EU imports

UK imports May-21 vs May-19
EU -17%
Non-EU +1% pic.twitter.com/h4hDgDXxRS

New ONS trade data for May just published shows UK-EU trade remains low compared to pre-TCA levels

Surprisingly difference relative to non-EU trade is driven entirely by imports, not exports

Goods trade May-21 vs May-19
EU -12%
Non-EU -2%
Total -7% pic.twitter.com/9yYUp0YZAU

Exports are lower than pre-TCA and pre-Covid, but the decline is similar for EU and non-EU exports

UK exports May-21 vs May-19
EU -5%
Non-EU -6% pic.twitter.com/kYTwwvA2rd

But note the big unexplained discrepancy between ONS & Eurostat data on UK exports to EU in 2021

Eurostat data has UK exports to EU down by about 25% this yearhttps://t.co/IRcGZjaYl4 pic.twitter.com/kjJlkg3EV1

It remains a mystery why ONS data so far shows a big Brexit effect on imports, but not on exports as @Louis_Ashworth discusses herehttps://t.co/LHZlzRzpBP

Combination of Brexit and Covid-19 means total UK trade still lower than at start of 2019, particularly for services

Total trade compared to Jan-19:
Goods -8%
Services -17% pic.twitter.com/ri8fp5PCmr

Overall, there's not much new to conclude from the May data. Trade remains subdued, particularly imports from the EU. Less clarity on what's happening to exports because of ONS vs Eurostat differences.

11.52am BST

Britain's economic recovery stumbled in May when growth slowed to 0.8% after a contraction in building work and a slump in car production.

It was the fourth consecutive month of GDP growth, and followed 2% growth in April, but the slowdown in May was sharper than expected after City economists had forecast a 1.5% increase.

11.37am BST

China's central bank has cut the amount of cash that banks must hold as reserves, in an attempt to spur lending and underpin its economy as growth slows.

The timing and magnitude of the PBoC's move, coming a week before second-quarter growth data, suggests growing concerns about the economy's outlook, economists said.

The PBOC came in broader and sooner than expected, highlighting the policy urgency to support the China economy," said Ken Cheung, chief Asian FX strategist at Mizuho Financial Group Inc.

#PBOC delivered a 50 bps RRR cut to spur lending to SMEs. The pace of policy tightening has been too aggressive! Two key takeaways: https://t.co/eS0ABdk4nE pic.twitter.com/rGoOVEc85t

1) This constitutes a shift in PBOC's stance, as expected, which puts a floor on PE multiple compression. Arguably, the PBOC's will now appear even more accommodative vs the Fed. However, this will not offset the downside pressures on earnings stemming from the regulatory probe.

2) Investors should brace for much weaker data next week... we expect Q2 GDP to decline to 6.1% y/y vs consensus 8.0%. Sequential recovery may also undershoot expectations of a 1.0% q/q expansion, as June retail sales will not benefit from a rise in COVID cases in Guandong.

10.59am BST

European stock markets are rebounding this morning, after Thursday's selloff.

The UK's FTSE 100 has gained 50 points, or 0.7%, back to 7080 points -- recovering around half of yesterday's fall when falling bond yields and rising Covid-19 worries rattled markets.

The source of all the stress was the bond market, where yields started to break down. Such a move usually signals worries about weaker economic growth, which would ultimately translate into slower rate increases by central banks.

When the bond market says something might be wrong, other asset classes pay attention. Stock markets came under fire yesterday and commodity currencies got hammered, while safe havens like the yen and Swiss franc shined bright. It was a classic risk-off move, with concerns around the rampaging Delta variant being blamed as the catalyst.

10.39am BST

Philip Morris International, the tobacco company and maker of Marlboro cigarettes, has struck a 1bn deal to buy Vectura, the British pharmaceutical company developing a pioneering inhaled treatment for Covid-19.

The 1.04bn offer by Philip Morris International, which is investing billions to move away from its core tobacco business, trumps the 958m tabled by the private equity group Carlyle in May. Vectura's board had recommended that shareholders accept Carlyle's offer but withdrew support for that bid after receiving the higher offer from PMI.

The acquisition will provide our people with the opportunity to form the backbone of an autonomous inhaled therapeutic business unit of PMI, helping develop products to improve patients' lives and address unmet medical needs."

10.31am BST

We had been expecting to get the latest UK trade data at 7am.....But unusually, it's been delayed by a processing issue.

Instead, we'll get the headline figures at noon today, with the full report expected next week.

We have uncovered an error in the UK trade data prior to the planned release on 9 July 2021 at 7am. The error has occurred as we opened up the 2020 year to take on board corrections to HMRC data for non-EU trade which has caused a processing issue for the EU data.

We will be able to correct our headline figures by 9 July 2021 at 12pm.

ONS cancelled UK trade data release due today saying theres been corrections to HMRC data" which caused a processing issue for EU data" ... unclear if this will shed light on notable differences on the quantum of the early post Brexit trade hit between ONS & eurostat pic.twitter.com/uXDHJGZzkG

Update: the headline data will be published at noon now, and they hope to publish the details next week...

10.17am BST

Ending the furlough scheme and the pandemic 20-per-week uplift in universal credit at the end of September could both hurt the UK's recovery, warns Sam Miley economist at the Centre for Economics and Business Research.

He writes:

Overall, the economic recovery is set to continue in the near term. Indeed, much of the recovery is set to be concentrated in the coming months, with Cebr forecasts pointing to quarterly growth of 4.2% in Q3. This will largely be facilitated by the proposed easing of remaining restriction measures from July 19th and, notably, will take output above its pre-pandemic level.

Beyond that, there are emerging signs of growth levelling off, with faster economic indicators pointing to slower growth in card spending and consumer footfall.

9.51am BST

The easing of lockdown restrictions on hospitality, leisure and entertainment companies provided pretty much all the 0.8% growth in May.

The accommodation & food sector (which grew by 37%) contributed around 0.7 percentage points of growth, as people took the opportunity to eat indoors or stay in hotels again from May 17th.

Like April, May's GDP growth was faster than usual but almost entirely driven by the lifting of Covid-19 restrictions, with the hospitality sector accounting for 0.7 percentage points of May's 0.8 per cent growth.

Underlying growth is moderate outside the sectors being unlocked, with supply constraints contributing to the continuing recent stagnation in manufacturing. It remains to be seen whether the lifting of further restrictions in July contributes to a continuation of strong growth in the third quarter or - if cases of Covid-19 continue to rise - increased caution among consumers and even another national lockdown."

Like April, May's #GDPgrowth was faster than usual but almost entirely driven by the lifting of #COVID19 restrictions, with the #hospitality sector accounting for 0.7 percentage points of May's 0.8 per cent growth. Underlying growth is moderate outside the...

1/3#NIESRGDP

...sectors being unlocked, with supply constraints contributing to the continuing recent #stagnation in #manufacturing. It remains to be seen whether the lifting of further restrictions in July contributes to a continuation of strong #growth in the third quarter or...

2/3

- if cases of #COVID19 continue to rise - increased caution among #consumers and even another national #lockdown

Our full analysis will be out shortly - Watch this page

3/3#NIESRGDP #CovidEconomics #EconTwitter https://t.co/bZNRe8anIT

9.19am BST

The slowdown in UK growth in May highlights the residual uncertainty in the pace of recovery", says Alastair George, chief investment strategist at Edison Group:

The weakness, relative to consensus forecasts, was broadly spread. However in manufacturing semiconductor shortages crimped output, rather than any demand shortfall.

The outlook for the remainder of the year is all about delta" and whether vaccinations can keep COVID-19 hospitalisations at acceptable levels during the autumn. Early UK data which indicates, according to our estimates, an 80% reduction in hospitalisation versus the second wave is clearly encouraging, but this is a preliminary assessment and there remains the risk of another yet more transmissible variant."

9.10am BST

The muted rise in GDP in May is especially disappointing at a time when some more timely indicators suggest that the economic recovery lost a bit more verve in June, says Paul Dales of Capital Economics.

Of course, the pace of the recovery was always going to slow as the economy climbed back towards its pre-crisis level. But we hadn't expected it to slow so much so soon.

This could be a sign that the recent rise in COVID-19 cases and the delay to the final easing in COVID-19 restrictions from 21^st June to 19^th July are hampering the recovery.

8.48am BST

Jonathan Gillham, chief economist at PwC, points out that May's cold, rainy weather will have hurt the building sector (construction output fell by 0.8% during the fourth wettest May since 1862).

The data for May show that the recovery is continuing at pace, with the economy now showing four consecutive months of growth. Growth patterns were largely driven by people's behaviour changing as they came out of lockdown - supermarket sales fell as more people ate out, consumers bought more on the high street and less online, more people travelled, so demand for petrol rose by 6.2%.

The energy sector also received a boost because of colder weather experienced in May, but that is a mixed blessing and there were also significant weather related construction delays.

There are some concerning patterns though - output fell in several manufacturing sectors, microchip shortages disrupted car production, and while consumers spent more time on the high street, overall retail sales were down. Construction numbers fell and so too did components of the financial services sector.

These trends suggest continued consumer caution and that businesses, despite having adapted amazingly well to lockdown conditions in the first quarter, may struggle to fully return capacity to pre-COVID levels."

8.42am BST

UK manufacturing of motor vehicles, trailers and semi-trailers' fell by almost 27% in May -- a very steep decline in output.

8.17am BST

The 0.8% rise in UK production output in May was partly due to stronger demand for energy in the unusually chilly weather, the ONS explains:

Both electric power generation, transmission and distribution and manufacture of gas; distributions of gaseous fuels through mains; steam and aircon supply, saw strong growth; growing by 3.8% and 11.7% respectively.

May 2021 was the coldest since May 1996 and saw comparatively low wind speeds, which led to substantial increases in gas demand for electricity generation.

8.05am BST

The slowdown in growth in May shows that the recovery is incomplete, says James Smith, research director at the Resolution Foundation.

He warns that the danger of overdoing the optimism on the economy is greater than the risk of it overheating:

The economy continued to bounce back in May following the deep lockdown freeze at the start of the year.

But with the economy still 3.1 per cent weaker than pre-crisis - a gap larger than at any point during the 90s recession - and more timely measures of economic activity such as footfall and spending suggesting that progress has plateaued in recent weeks, the recovery is far from complete.

The danger of overdoing the optimism on the economy is greater than the risk of it overheating." @JamesSmithRF responds to the latest @ONS GDP figures, with a wider view on where we're at with the Covid recovery. pic.twitter.com/xNuuDuE1AO

7.52am BST

UK GDP grew by 3.6% in the three months to May 2021.

That's mainly because of strong retail sales over the three months, increased levels of attendance as schools reopened from March, and the reopening of food and beverage service activities, the ONS says.

7.42am BST

Pubs and restaurants were responsible for much of the growth in May, says Jonathan Athow, the UK's deputy national statistician.

That's because they were allowed to service customer indoors from mid-May.

Commenting on the GDP figures for May, @jathers_ONS said: (1/2) pic.twitter.com/jDrupIYOiJ

.@jathers_ONS continued: (2/2) pic.twitter.com/NP3V6gQP4s

Food and beverage services activities was the main contributor to the growth in consumer-facing services, growing by 34.0% in May 2021 as restaurants and pubs could serve the public indoors for part of the month.

Strong growth means that the industry is now 9.4% below its pre-pandemic level (February 2020), but 0.3% above its August 2020 peak when the Eat Out to Help Out Scheme boosted consumer demand for bars and restaurants. Arts, entertainment and recreation also contributed positively to consumer-facing services growth, growing by 7.3%.

7.27am BST

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

It's great to see people back out and about thanks to the success of the vaccine rollout, and to see that reflected in today's figures for economic growth.

Our unprecedented package of support - including business loans, the furlough scheme and a reduced rate of VAT for the hospitality and tourism sectors - has protected millions of jobs and helped businesses survive the pandemic.

7.22am BST

This chart shows how the UK economy has now grown for the fourth month running, but slower compared with March (2.4%) and April (2.0%).

7.19am BST

The UK's services sector led the recovery in May, the ONS says -- as the return of indoor drinking and dining boosted the hospitality sector.

Industrial production rose too -- because the weather was so bad in May, meaning more demand for energy.

7.10am BST

Breaking: The UK's recovery from the pandemic slowed in May, despite the latest easing of lockdown restrictions boosting hospitality venues.

UK GDP expanded by 0.8% during May, the Office for National Statistics reports, much weaker than the 1.5% growth expected.

UK MAY GDP +0.8% MM (POLL +1.5% MM

UK MAY GDP +3.6% 3M/3M (POLL +3.9%)

GDP grew 0.8% in May but remains 3.1% below its pre-pandemic peak:

services grew 0.9% (3.4% below peak)
manufacturing fell 0.1% (3.0% below peak)
construction fell 0.8% (0.3% above peak)

https://t.co/ncESKTKsQs pic.twitter.com/r3J0Ak6X6g

6.48am BST

Alvin Tan of RBC Capital Markets expects the UK economy posted robust growth in May:

May GDP may have suffered a minor setback as the proportion of pupils absent for Covid-19 reasons began to rise again that month. However, private sector activity continued to rebound in May, helped by the reopening of hospitality venues for indoor service.

According to CHAPS card spending data, spending on social activities had reached 85% of its pre-crisis level by the end of the month compared to 75% at the end of April.

6.47am BST

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

We're about to find out how the UK economy fared in May, as the first estimate of GDP for the month is released.

With the May unlocking proceeding as expected and with services PMI hitting a 24 year high the latest monthly GDP for May is expected to see another 1.5% jump in monthly GDP, as the UK economy continues to accelerate out of the traps, pushing the 3M/3M rate up to 3.9%, from 1.5%, with services expected to lead the recovery, with a 1.6% expansion.

First, there are genuine risks posed by the COVID-19 Delta variant, and other potential variants, to the global economic outlook, with the inability of some countries to successfully vaccinate and manage the virus meaning the pandemic may be around for the foreseeable future.

Second, what are highly efficient modern markets may have already, in fast-fashion, discounted all of the expansion, peak and now contraction in this business cycle.

European stocks set for muted open after global sell-off on recovery concerns https://t.co/YUGu5zYymk

G-20 finance ministers are set to endorse global tax deal in Venice https://t.co/OHu327zwny via @aspeciale @AlexJFMorales pic.twitter.com/sqx0PW4OxQ

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