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Is this the UK’s roadmap to economic recovery?

Toby Sims

Toby Sims - Fidelity International

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

For many of us, the last couple of weeks have had a very different feel to them. Pub gardens are back, shops are open, the blossom is out, and, dare I say it, the weather has markedly improved. It almost feels as if things might be on the up.

Even economists are embracing the springtime optimism. Earlier this week, city analysts revised their Gross Domestic Product (GDP) estimations for 2021 up from 4.7% in March to 5.7% now. If realised, that would see Britain’s sharpest economic growth since 1988.

Don’t worry, the analysts aren’t feeling unduly chipper. Their revised estimations are driven by expectations over what will happen to the £180 billion of “accidental savings” that Britons have accrued over the course of the pandemic. 

Talk so far around these savings had been wary. It’s far from clear that households will necessarily spend their extra cash, given that most of its been accumulated among the wealthy, who are typically less likely to spend any unexpected windfalls. 

Now, however, the destiny of those savings is starting to become clearer. We can see the effects of a nascent spending splurge in March’s UK Retail Sales data, published this morning. 

Retail sales volumes climbed 5.4% in March from the previous month, a strong growth from February’s 2.2% rise and far higher than the forecasted 1.5%.

This is an impressive gain, given that non-essential retail remained closed over the period. Clearly shoppers have wasted no time spending in anticipation of a more social summer. Sectors which saw the highest levels of growth were clothing stores, up 17.5% (though still over 40% down on pre-pandemic levels) and petrol stations, which saw their first monthly growth since October, up 11%. The reopening of schools on 8 March will have contributed here.

March’s data suggest people are willing to spend their accidental savings. Given this encouraging start, we can expect a much steeper rise in retail sales over April when non-essential stores reopened. That could mark the start of a significant economic recovery, the sort of which analysts have begun factoring into their revised GDP estimates. 

There are other encouraging signs. Yesterday’s GfK Consumer Confidence index data showed that consumer confidence in April reached its highest level for 13 months, while today’s IHS Markit/CIPS UK composite PMI figures also bode well. Economic activity in March rose to its highest level since November 2013. A rise from 56.4 in March to 60.0 in April (with anything above 50.0 signalling growth) is well above the 58.2 forecast.  

The jobs market also shows signs of encouragement, though these should be treated with caution. The unemployment rate averaged 4.9% over February, slightly down on 5% in January, while there have been tentative signs of a pickup in employment over March. The Office for National Statistics (ONS) said vacancies increased by 16% in March compared to February. 

Economists are divided, however, over the longer-term buoyancy of employment levels. Some believe the stable levels exhibited over lockdown point to a robust labour market; others argue that they’re not enough to cope without the furlough scheme, due to end in September. It’s important to remember that, for all the positive noise we’re likely to hear over the coming months, the economy is not out of the woods yet.

Another anxiety will start to play on the mind of the Treasury as consumers get out and spend - how much inflation it’s willing to tolerate. 

Increasing consumption levels will almost certainly drive inflation higher over the short term. In fact, it’s already begun. Off the back of the positive retail sales, and in particular rising petrol and clothing prices, UK inflation jumped to 0.7% in March, up from 0.4% in February. The Bank of England estimates inflation will reach 1.9% by the end of 2021. Many economists expect it go higher.

Inflation sounds scary, but it’s not necessarily a bad thing. The Bank’s estimate is still below its target level of 2%. Anywhere around 2-4% would fit comfortably within the “goldilocks” bracket that’s just right for equity prices - not too much inflation, not too little. The time to worry would be if much higher levels become structural. So far, there’s little sign of that happening.

Nevertheless, a pause for breath is likely to come somewhere down the line. The summer months should see consumers return to the high streets in droves, which is good for our beleaguered economy, but it may not be enough to mend any lasting structural damage. As ever, maintaining a well-diversified, long-term view of things should help investors through both good and bad times ahead.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.