Monthly economic brief: July 2020

Consumption

Physical distancing measures, alongside more fragile household finances and weakening consumer sentiment is impacting demand in the economy and overall saving and consumption patterns.

Consumer sentiment

• UK consumer sentiment has fallen sharply since the end of March, reflecting weaker expectations about the performance of the economy and personal household finances.
• UK Consumer Sentiment for June^[19] remained low at -30, and close to its level during the financial crisis.
• Compared to May, households in June reported small improvements in economic and household financial expectations for the next 12 months and a pick-up in attitudes towards savings and major purchases.
• UK Flash consumer sentiment^[20] (collected 18 – 26 June) showed that UK consumer confidence continued to improve slightly in the second half of June, however, overall consumer confidence remained significantly lower than prior to the pandemic.

Consumer spending

• UK consumer spending data^[21] showed a 27% fall in consumer spending over the year to May 2020 following a sharper fall of 37% in April.
• Spending on essentials grew slightly by 1% due to a 25% increase in supermarket spend, while non-essential spending declined by 37% driven by large falls in travel spend (-87%) and spending in bars, pubs and clubs (-95%).
• Digital subscriptions continued to increase in popularity with strong growth of 49% potentially reflecting increased demand through home working, learning and entertainment. Spending on Eating and Drinking saw a decline of 70% in May, up from the almost 80% fall in April, due to more pubs, cafes and restaurants offering take-away and delivery services.

Consumer lending and repayment^[22]

• While consumer spending has fallen sharply during lockdown, likely reflecting a combination of essential retail closure and weaker sentiment regarding the outlook, the CJRS has been supporting incomes of those not working. This has been reflected in consumers taking on less new borrowing and repaying more existing borrowing.
• Gross lending to UK consumers was £13.6 billion in May, up from £11.8 billion in April, but remained notably below the average of £25.5 billion average in the six months to February 2020.
• Repayments on consumer borrowing fell to £17.7 billion in May, from £19.9 billion in April, however more than offset new borrowing for the third month in a row.
• On net, consumers repaid £4.6 billion of consumer credit over the month, following net repayment of £11.2 billion over March and April.
• Overall, the fall in net consumer credit continues to show that consumer spending remains weak, with the fall in the size of repayment over the month potentially reflecting a combination of gradual lifting of lockdown restrictions, stronger consumption and/or household cashflow challenges.

Retail sales

• Scottish Retail Consortium data^[23] on retail sales for May reported an annual decrease of 27.5% in total retail sales in Scotland, easing from the record fall in April (-40.3%).
• The decline in retail sales in May was mainly driven by a fall in non-food retail sales. Over the year to May, non-food retail sales fell by 53.2%, while food retail sales increased by 3.6%.
• The combination of lockdown measures, increased pressure on incomes and weaker sentiment are likely impacting the overall fall in retail sales.

Inflation and interest rates

• The fall in demand, alongside the fall in oil price to record lows has placed downward pressure on inflation at the start of 2020.
• The Consumer Prices Index including owner occupiers' housing costs (CPIH) 12-month inflation rate was 0.7% in May 2020, down from 0.9% in April 2020.^[24]
• Key downward contributions to the rate came from falling prices for motor fuels and a variety of recreational and cultural goods. The largest partially offsetting upward contributions came from a rise in foods and non-alcoholic drinks.
• The Bank of England reduced the Bank Rate to 0.1% in March 2020^[25] and in their current central scenario analysis project inflation to fall to 0.6% in 2020 and 0.5% in 2021 before picking up to target at 2.0% in 2022.

Sectoral Exposure Analysis

This box explores the challenges different sectors could face towards the end of this year and over the next 5-10 years, with businesses facing a double challenge of both recovering from the impacts of COVID-19 as well as facing the challenge of higher barriers to trade with the EU.

The end of the transition period represents an additional risk to the sectors already exposed to COVID-19, especially those with EU supply and demand chains or those whose labour supply will be affected by the removal of freedom of movement for workers.

Exposure to Trade Barriers

From the 1st January 2020, with no transitionary period extension, many sectors will see the introduction of new barriers on trade with the EU. This will primarily take two forms: tariffs and non-tariff barriers to trade (NTBs).

Tariffs on UK trade with the EU will depend on the form of EU exit. If no UK-EU trade agreement is agreed, UK exports into the EU would face EU Most-Favoured Nation (MFN) tariffs.^[26] Under this scenario, agriculture and food products will face the majority of the high tariff lines, while generally smaller tariffs apply to manufacturing products. In addition to this, all sectors would also face tariffs on imports from the EU as detailed by the UK Government^[27], where significant import tariffs would be faced across many agricultural and food product imports. In the event of a 'skinny' UK-EU trade agreement, the extent of tariff elimination is unclear, with the possibility of many of these tariffs remaining.

In addition to tariffs, firms will face NTB on EU trade. NTBs are defined as technical, regulatory, and administrative barriers to trade, including barriers relating to custom procedures and other at the border costs.

Some of the highest NTB would be seen in the categories of agricultural, food and drink products^[28]. For example, food safety and animal and plant health checks^[29] are used to ensure that imported goods are safe for health. This could take the form of additional administrative requirements for these goods, as well as checks at the UK-EU border. For manufacturing industries, another barrier in the form of technical barriers to trade would be faced. These barriers relate to compliance with manufacturing processes to ensure protection of human health and safety or protection of the environment.^[30]

The context of COVID-19

Analysis on the sectoral exposure to COVID-19 were published in State of the Economy: April 2020^[31]. This detailed the different domestic and international channels through which sectors have been exposed to lockdown restrictions around the world and found cumulative impacts across all economic channels to be greatest for manufacturing, construction, retail & wholesale, accommodation & food services, and arts, entertainment, and recreation.

Table 1: Sectoral Exposure to a no EU trade deal exit and COVID-19 ^[32]

Sector	No EU trade deal	COVID-19: International Supply	COVID-19: International Demand	COVID-19: Domestic Demand	COVID-19: Labour Market Disruption
Primary/Manufacturing Sectors
Agriculture, forestry and fishing	R	Y	A	Y	Y
Mining and Quarrying Industries	R	Y	A	A	Y
Manufacturing	R	R	R	A	R
Electricity, Gas & Water Supply	A	Y	Y	Y	A
Construction/Service Sectors
Construction	A	Y	Y	R	R
Retail & wholesale	A	Y	Y	R	R
Transport & Storage	A	Y	Y	A	A
Accommodation & food services	A	Y	A	R	R
Information & Communication	A	A	Y	Y	Y
Financial & Insurance Activities	A	Y	Y	Y	A
Real Estate Activities	Y	Y	Y	Y	A
Professional, Scientific& Technical Services	A	Y	A	Y	A
Administrative & Support Services	A	Y	Y	A	R
Public Administration and Defence	Y	A	Y	Y	R
Education	Y	Y	A	Y	R
Health and Social Work	Y	A	Y	Y	R
Other Services	Y	Y	Y	R	R
Legend	Red [R]: Most Exposed
	Amber [A]: Medium Exposure
	Yellow [Y]: Least Exposed

Table 1 combines trade barrier exposures faced by sectors in the event of a no UK-EU free trade agreement with aforementioned analysis on COVID-19 exposures to illustrate what sectors could face the biggest challenges.

The table indicates that some industries, such as agriculture, forestry and fishing who may be relatively less exposed to the impact of COVID-19 could be more exposed to EU exit trade shocks. It also suggests that a number of sectors can be expected to face a double hit. For example manufacturing industries are found to have a high exposure to the COVID-19 shock and to the EU exit trade shocks. Even sectors with relatively low direct exposure to trade such as construction could also face a relatively high impact from leaving the EU without a trade deal due to the indirect impacts from the shock to the economy as a whole.

The UK economy will experience a change in its trading relationship with its biggest trading partner at a time when businesses are still recovering from the COVID-19 crisis. Companies already dealing with trading difficulties, increased indebtedness and restricted cash flows could face further disruption in the form of increased tariffs, customs declarations, border delays, and reduced access to EU workers. This highlights the importance of a comprehensive trade deal with the EU.