The UK recovery is rapidly losing momentum says Paul O’Connor, Head of Multi-Asset at Janus Henderson Investors

Despite the temporary boost from the Chancellor’s “eat out to help out” programme, August GDP data show that the UK’s economic recovery was already slowing at the end of the summer. GDP grew by 2.1%, compared to a consensus expectation of 4.6%, showing a marked deceleration from growth of 9.1% in June and 6.4% in July. Growth was below 29 out of 30 economists’ predictions. The disappointment was broad-based and was echoed in other data released today, covering the construction, manufacturing and services sectors.

Still, August feels like a long time ago now and market focus will quickly shift away from these summer numbers to focus on how the recovery is faring in the autumn months and the outlook further out. The evidence here, so far, is not encouraging. Recent high-frequency data are already pointing to a further downshift in economic activity in September, hinting that the UK recovery is rapidly losing momentum.

The recent rise in COVID-19 cases in the UK is certainly an important factor here. The resurgence highlights the difficult trade-off that the government now has to make between the health impact of the pandemic and the economic cost of social restrictions. The government is reluctant to introduce another full-scale national lockdown, but further restrictions are undoubtedly imminent. While the focus for now is still on regional measures, if these fail to gain traction, the next step might involve a national “circuit breaker”, shutting pubs, bars and restaurants around the county for a few weeks.

It seems inevitable that increased social restrictions will impede economic activity over the next few months at least. Spending in the beleaguered retail, leisure and entertainment sectors will certainly take another hit. It is also possible that further restrictions will weigh heavily on already-depressed consumer confidence, at a time when unemployment is trending higher. The winding down of the furlough scheme, is likely to see continued job losses in the months ahead with unemployment rising above 7% at the turn of the year. Survey evidence suggests that the UK consumer confidence is already slumping and households are cutting plans to major purchases, as they grow more concerned about the outlook for their personal finances.

Alongside this coronavirus-related uncertainty, the ongoing Brexit negotiations also overshadow the outlook for Q4 and beyond. Despite the now-familiar theatrics, we still expect a deal to be scrambled together sometime in the weeks ahead. However, any such last-minute deal is likely be narrow in scope, focusing largely on avoiding tariffs and quotas in manufacturing and with limited coverage of the service sector. That would amount to a fairly hard Brexit, constructive for neither UK growth nor global investor appetite for UK risk assets. A “no-deal” exit would be even worse.

The UK heads into the final months of an eventful year, with tighter social restrictions, fading economic stimulus and Brexit uncertainties weighing heavily on business and consumer confidence. The risks to the economic outlook are clearly skewed to the downside. Any further loss of economic momentum in the weeks ahead will increase expectations for the Bank of England to announce more QE in October and to signal a willingness to cut interest rates in the New Year. Still, these sorts of monetary measures will hardly transform the economic outlook. We are now in an economic environment in which fiscal policy has considerably more scope to boost growth than monetary policy. Against this backdrop, the planned rapid withdrawal of fiscal stimulus in the UK looks inappropriate and we expect further stimulus measures to be unveiled if the recovery continues to falter.