U.K. Economic Activity Surges at Fastest Pace in Seven Years - Bloomberg

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U.K. economic activity accelerated at the fastest pace in seven years this month, providing more signs of a strong rebound as the government began allowing stores and restaurants to reopen.

A survey of purchasing managers rose in April to its highest level since 2013, and retail sales in March grew the most in nine months. Both indicators beat economist’s expectations by a wide margin.

The figures indicate pent-up demand from both consumers and businesses after almost a year of restrictions to control the coronavirus. The Treasury and Bank of England anticipate a sharp recovery from the worst recession in three centuries as Prime Minister Boris Johnson’s government makes rapid progress on immunizing the population.

“In the U.K. you have record net wealth, you have strong labor markets, you have this excess savings pile,” Kallum Pickering, senior economist at Berenberg, said in an interview on Bloomberg Television on Friday. “Households are ready and eager to spend as soon as we ease the remaining restrictions. We’re going to go on a big spending spree in the U.K.”

Read More: Euro-Area Recovery Kicks In as Services Return to Growth

Friday’s reports cap a week of data suggesting the U.K. will recover with fewer scars than in previous recessions. Inflation remained subdued in a report released on Tuesday, and a report on the labor market showed job vacancies accelerated earlier this year.

Another report Friday showed the Treasury built up the largest budget deficit in peacetime history in the fiscal year that ended in March, albeit a smaller one than had been expected. The result allowed the Debt Management Office to pare back its outlook for bond sales needed to finance spending.

Shopping Returns

Retail sales were 1.6% higher in March than pre-pandemic levels

Source: Office for National Statistics

IHS Market’s flash Composite Purchasing Managers Index climbed to 60 in April. above the critical 50 mark that signals expansion for a second month. The U.K.’s dominant service sector, which has been hard hit by Covid-19, outperformed manufacturing for the first time since Covid-19 hit the U.K. It rose to 60.1, the highest since 2014.

Businesses expectations for the next year held near their record high and jobs were created at the fastest pace since 2017. Companies mostly pointed to additional staff hiring as opposed to the impact of recalls from furlough. Chancellor of the Exchequer Rishi Sunak has spent billions on measures to keep firms going in hopes they would not only keep on existing workers, but be able to resume operations quickly as demand picks up.

“Business activity should continue to grow strongly in May and June as virus restrictions are eased further, setting the scene for a bumper second quarter for the economy,” said Chris Williamson, chief business economist at IHS Markit. “Firms have been encouraged firms to take on extra staff at a rate not seen for over three and a half years.”

The PMIs did raise red flags. Exports returned to growth after three months of decline, but the performance was muted and many firms cited post-Brexit trading conditions for the malaise. Prices charged for goods by manufacturers rising at a rate not seen for a decade, linked to higher input costs and supply shortages, making higher inflation “inevitable,” Williamson said.

The PMI survey is a flash estimate based on about 85% of the usual total responses. Data was collected April 12 to April 21.

What Our Economists Say ...

“The stronger-than-expected retail sales figures in March point to a less severe contraction in GDP in the first quarter. It may also be a precursor to a rapid turnaround once the lockdown ends. Pent-up demand and higher savings are likely to unleash a consumer-led recovery in 2Q when we forecast the economy will expand by 5%.”

Niraj Shah, Bloomberg Economics. Click for the full REACT.

U.K. retail sales showed surprising strength during the last full month of restrictions. The volume of goods sold in shops and online rose 5.4% in March from the month before, double the gain of the previous month, the Office for National Statistics said Friday. Economists had expected 1.5% growth.

The Bank of England estimates households have accumulated 150 billion pounds ($208 billion) of savings built up when lockdowns prevented them from spending. Retailers are hoping to grab a bit of that to help make up for last year’s slump.

The outlook for April retail sales is for even stronger growth. Retail footfall in the week after lockdown eased jumped to 75% of levels seen in the same period of 2019, according to Springboard data published by the ONS on Thursday. Card transaction data from the Bank of England showed purchases of delayable goods such as clothing and furnishings surged to 89% of their pre-pandemic level.

Consumers remain cautious though, according to GfK’s confidence index. It rose just 1 point in April, and households indicated that they were slightly less willing to make major purchases.

“The improvement in the consumer mood since January is welcome, but the pandemic has hit household finances hard,” said Joe Staton, GfK’s client strategy director. “There’s every chance that as the recovery gains momentum and the numbers get stronger, confident consumers will continue to spend.”

— With assistance by Lizzy Burden, Anna Edwards, and Zoe Schneeweiss

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