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● Retail rebounds robustly: Despite rising near-term uncertainties linked to the surge in SARS-CoV-2 infections at home and global supply issues, UK consumers are opening their wallets like rarely before. In line with the easing of virus restrictions, real retail sales ex. auto fuels jumped by 11.2% qoq in Q2. The gain more than reverses the 6.2% qoq drop in Q1. Real retail sales rose 0.3% mom in June, boosting them to 10% above their pre-pandemic level (January 2020). As an early indication of trends in household consumption (which makes up two-thirds of GDP), the surge in retail spending in Q2 is in line with our estimate that real GDP expanded by 4.7% qoq in Q2 following the 1.6% drop in Q1. The UK remains on track to fully recovery from the pandemic shock by early 2022.
● Confidence recovering: UK households have accumulated over £200bn in excess savings since the pandemic hit. Part of this extra cash fuels the ongoing surge in spending. With what is left over, households will further add to their net worth – which hit a record high of £11.4 trillion in 2020 after rising 8.4% on an annual basis. Strong fundamentals add to the feel-good factor. Households’ reported financial situation remained at a survey high in June (since 1996) as headline confidence edged higher to -7 from -9 in May. Households’ appetite for major purchases continues to rebound – the survey balance jumped to 2 in June from -5 in May and -24 in January.
● COVID-19 uncertainties: Daily recorded SARS-CoV-2 infections have surged in the UK since late May as the Delta variant has spread. However, relative to the sharp rise in infections, the vaccination rate among high-risk groups has dramatically cut the rate of hospitalisation and death versus previous waves. Vaccine success underpins the UK’s policy to manage the ongoing wave with self-isolation of individuals exposed to the virus instead of blanket restrictions. Of course, such a policy adds to the uncertainty about the near-term outlook for the virus. Still, our latest European COVID-19 update presents some very tentative evidence that new daily infections in the UK and some other countries may be starting to level off.
● Delta impact and the ‘pingdemic’: As our chart shows, retail and recreation footfall has receded in recent weeks. In the week to 19 June, UK footfall remained around 7.5% below its pre-pandemic level, down from just 2% below in early June. This is likely due to two factors: 1) heightened caution by consumers amid the rise in infections; 2) the high number of people who are being told to self-isolate by the NHS COVID-19 app – 600k people were ‘pinged’ in the week to 14 July. While footfall may recede further, incoming data do not yet show any material economic hit from the Delta wave.
● All eyes on the UK: The UK remains the key test case for what happens when a country with a high rate of vaccination commits to returning life to normal and eases restrictions even as infections rise. From an economic point of view, the data paint a positive picture: 1) vaccines are working; and 2) economic data have largely decoupled from virus trends. No virus wave can last forever. With any luck, the current UK wave may peak soon and start to recede thereafter. If the UK manages to ride out the Delta wave without overwhelming its hospitals or reintroducing economically damaging restrictions, that would provide a positive signal for other advanced economies that have also eased restrictions after reaching a similar level of vaccination but are a just a few weeks behind the UK in terms of new infections.
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