The UK’s Limited Reopening Limited May GDP

The UK released monthly GDP for May today, giving the first official look at how the broader British economy benefited from the gradual reopening that began in the month. The results—1.8% month-over-month growth—missed expectations for 5.5%, generating disappointment and worries that renewed lockdowns will derail an already feeble recovery.^[i] Our perspective is rather different. For one, given this unprecedented situation, analysts’ expectations were always guesswork—you can see that in the widely varied US Q2 GDP expectations we discussed a couple of weeks ago. Two, if you look at the details underlying the headline results, modest GDP growth seems consistent with May’s limited reopening.

As in the US, the UK’s reopening wasn’t universal or all at once. The government’s reopening plans covered only England—the other three constituent countries (Scotland, Wales and Northern Ireland) set their own policies and generally reopened more slowly. Even within England, May’s reopenings largely covered factories and offices. Among retailers, only garden centers 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 recovery was always going to depend on a more complete High Street reopening.^[ii]

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

Given England’s reopening timetable, we suspect June’s results will be better—but not gangbusters, considering retailers didn’t return until mid-month and personal services were still shut. July’s results, which won’t hit 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 don’t draw big conclusions about the UK’s economic potential—and whatever they show, remember stocks look forward, not backward.