The UK’s Limited Reopening Limited May GDP

The UK released monthly GDP results (gross domestic product, a government-produced estimate of economic growth) for May on Tuesday, giving the first official look at how the broader British economy benefitted from the gradual reopening that began in the month. The results—1.8% month-over-month growth—missed forecasters’ expectations for 5.5%.^[i] In our review of financial media, the common reaction was disappointment and worry that renewed lockdowns will derail an already feeble recovery.^[ii] Our perspective is rather different. For one, given this unprecedented situation, analysts’ expectations were always guesswork. In the US, for example, financial outlets and government and private research outfits alike have hugely varying expectations for Q2 GDP that range from -5% annualised to -67%.^[iii] (Annualised refers to the effective annual growth rate if the quarter-over-quarter rate repeated for an entire year.) Two, upon closer review of the details underlying the headline results, we think modest GDP growth seems consistent with May’s limited reopening.

As in other countries, the UK’s reopening wasn’t universal or all at once. England has reopened more quickly than Scotland, Wales and Northern Ireland. But even within England, May’s reopenings largely covered factories and offices. Amongst retailers, only garden centres reopened in May, and that happened mid-month. All other non-essential retailers didn’t get the green light until mid-June, and most personal services and restaurants weren’t allowed to reopen until early July. Some, namely estheticians and other beauty providers, still aren’t open. Considering UK GDP is about 80% services, a material recovery was always likely to depend on a more complete High Street reopening.^[iv]

GDP’s categorical breakdown demonstrates this, in our view. The heavy industry component, which includes manufacturing and mining (primarily oil drilling), grew 6.0% m/m.^[v] Looking at heavy industry’s subsectors, manufacturing output jumped 8.4%, whilst mining notched a 5.0% rise.^[vi] That meshes well with factories’ May reopening. But services grew just 0.9% m/m, which is more stabilisation at a low level than actual growth, in our view.^[vii] It is also what we would expect given the very limited scope of reopened businesses. Even those who returned to office life had very limited options to shop or dine out after hours.

Given England’s reopening timetable, we suspect June’s GDP results will be better—but not necessarily robust, considering retailers didn’t return until mid-month and personal services were still shut. July’s results, which won’t be released until September, will be the first to register everything that has reopened thus far. Even then, they won’t represent the whole country, given Scotland and Wales’ slower paths. So keep an eye on them, but we suggest refraining from drawing big conclusions about the UK’s economic potential—and whatever they show, remember equities typically look forward—to future economic conditions—not backward.