The U.K. economy continued its recovery from a record slump, though the good news was clouded by mounting job losses and a growing government debt burden.
A broad measure of economic activity jumped to the highest in almost seven years in August, while retail sales rose more than forecast to surpass their pre-virus levels in July, reports on Friday showed. That pickup from the virus slump is fueled by huge state support, which pushed government debt above 2 trillion pounds for the first time.
IHS Markit said Friday that its composite Purchasing Managers Index jumped to 60.3 from 57, well above what economists had forecast. Meanwhile, retail sales rose 2% in July, giving a battered sector a brief respite from a litany of bad news.
The pound briefly moved off its low for the day after the PMI. It was at $1.3195 as of 9:36 a.m. London time, down 0.1%. Gilts held onto small gains, with the 10-year yield at 0.22%.
The U.K. PMI was far better than thereadings in the euro area, where the headline measure unexpectedly declined in August.
Still, Britain’s bounceback is from a very weak position and most economists predict U.K. output won’t recover its 2019 level until after next year. Markit’s report also showed that businesses remain concerned about the sustainability of the recovery. Confidence in the outlook declined, and companies cut employment at a faster pace.
A key risk is that as government support ends — notably the keyfurlough scheme — those job losses will mount, consumers will grow more worried, and spending will suffer. That could derail the economy’s revival from its record 20% slump in the second quarter.
“Positive signals for the recovery of course need to be considered in the context of U.K. GDP shrinking by around one fifth during the second quarter,” said Tim Moore, economics director at IHS Markit. “Worries about the state of the U.K. economy and the highly uncertain outlook for the pandemic led to a setback for business expectations.”
— With assistance by Simbarashe Gumbo
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