• Retail sales pick up in June as economy reopens, nudging CPI inflation up to 0.6%
• Furlough scheme supports jobs and spending, but labour market weakness is appearing
• Savings continue to grow strongly, and new NS&I target threatens to distort market
• Pent up demand sees recovery in mortgage market activity and house prices

UK ECONOMY BEGINS TO RECOVER AS HOUSEHOLDS BEGIN TO SPEND
 

1. The UK economy showed signs of a recovery in June, as shops and some leisure sites began to reopen. The volume of retail sales increased by 13.9% in the month, driven by increased sales of non-food items and fuel. The volume of sales is now around the same as pre-lockdown levels but the distribution of sales across shop types has changed with non-food store sales down 15% compared to pre-lockdown levels and food store sales up 5.3%, though some of this will reflect substitution from spending on eating out.  
    
2. This pickup in spending saw CPI inflation increase modestly to 0.6% in June, up from 0.5% in May. Higher prices for clothes, footwear and recreational activities more than offset falling costs of food, hotels and restaurants, even though most of these services were unavailable in June. However, consumer prices are likely to fall in coming months. The coronavirus outbreak has been overwhelmingly deflationary with a significant reduction in supply capacity, and an even greater reduction in demand.
    
3. The resilience of the labour market will be the largest determinant of how strongly the economy can recover. The Job Retention Scheme (JRS) and support for the self-employed have supported incomes, and to a large extent spending, since March. However, the scheme is becoming less generous and will close at the end of October.
    
4. The fall in demand across the economy has inevitably seen in a fall in demand for workers. Job vacancies were 58% lower between April and June than the previous three month period, and at their lowest levels since data was collected in 2001. Consequently average earnings growth has become weaker. In the three months to April total earnings growth was minus 0.3%, compared to +2.3% in the previous three month period, and the first negative reading since February to April 2009. In real terms (adjusting for inflation) total pay growth is now minus 1.3%, the lowest since April to June 2014.
    
5. The unemployment rate has remained stable at 3.9%, as people may be leaving the labour market rather than being categorised as unemployed. According to the ONS, early indicators suggest there were around 650,000 fewer workers on UK payrolls in June compared to March. In June, the claimant count (which includes some people in work but on low incomes) decreased slightly by 1.1%, but since March it is still up 112.2%, or by 1.4 million people. However the number of hours worked across the economy fell by 16.7% in the three months to May, equivalent to 877 million hours, and fell to its lowest level since 1997. Once the JRS closes in October the unemployment rate is likely to increase significantly as many people are likely to be made redundant. NIESR say that closing the scheme is a mistake, and it should be extended until June 2021. It is estimated this would cost an additional £10 billion, a much smaller cost than those associated with long term unemployment and loss in skills and productivity.
    
6. GDP growth was estimated to have grown by 1.8% in the month of May but GDP is still down by 19.1% in the last three months after record falls in March and April. The risks to the economy are clearly skewed to the downside, with the chances of a ‘second wave’ of Covid-19 relatively high. This would see further lockdown periods at home and abroad. NIESR believe there is an even chance that GDP at the end of 2023 will still be below the 2019 peak.

You can download the full market update here which includes analysis of the mortgage and savings markets.