UK private sector records fastest growth in over two decades

• UK recovery rebounds as Britain’s economy reopens following months of COVID lockdown restrictions
• IHS Markit’s May PMI data revealed the UK Composite Index grew at a record pace
• British pound to US dollar (GBP/USD) exchange rate hits USD 1.42
• The number of billionaires in the UK increases despite depressed business activity

Three sets of figures out of the UK on Friday have revealed that our high streets are roaring back to life, the housing market is still on fire, and the broader UK economy is in full steam ahead.

Despite months of coronavirus lockdown restrictions, data released by IHS Markit today confirmed Britain’s private sector grew at its fastest pace in twenty-three years in May 2021.

The improvement in business activity was driven by the latest round of COVID easing and vaccine progress, which has pushed consumer confidence to record highs.

Pound Sterling (GBP) has also benefited from the data and is on track to record its third successive week of gains against the US dollar (USD), as the latest series of data has reinforced market expectations for a robust economic rebound in the UK.

According to IHS Markit/CIPS, the flash UK Composite PMI reading came in at 62 for May, up from 60.7 in April and the fastest growth rate since the record began in 1998.

Meanwhile, UK manufacturing activity jumped up from 60.9 in April to 66.1 in May – the highest reading since the survey began nearly thirty decades ago.

The UK Services PMI also gained momentum in May, up from 61 in April to 61.8 in May and given that indoor hospitality has just reopened, there is scope for further growth in June following the further easing of COVID-19 restrictions.

IHS Markit economists said growth had been driven by the partial reopening of the hospitality sector and shops reopening, which helped trigger a rise in consumer and business spending in May.

Chief business economist at IHS Markit, Chris Williamson, said he believes Britain is experiencing an unusual growth spurt, noting that the “services sector is reporting near-record growth as the unlocking of the UK economy has boosted business trade.”

With fears over COVID-19 abating, business confidence has hit record highs, and factory orders are surging at a record pace due to improved global demand for goods and services. 

IHS Markit said May PMI’s are consistent with optimism towards the outlook for UK gross domestic product (GDP), which has been upgraded to 7.25% in 2021 by Bank of England (BoE) policymakers.

Separate data released by the Office for National (ONS) statistics on retail sales volumes also supports this view, with figures showing that retail spending surged in April.

UK retail sales surges as high street shops reopen

Analysts had been expecting a solid rebound in UK retail sales data, but they received a “blockbuster”.

According to the ONS, retail sales volumes surged by 9.2% month-on-month in April as the UK government lifted coronavirus restrictions on non-essential stores.

The Office for National Statistics confirmed that the increase in consumer spending meant that retail sales figures were 10.6% higher than pre-pandemic levels in April, with clothing demand proving particularly popular, jumping up by 69.4%.

April’s jump was also more than double the pace anticipated by economists and marked the most significant spike in retail sales since June 2020.

The ONS noted that shoppers appeared to be focused on purchasing clothes for enjoying new freedoms rather than loungewear ahead of the reopening of indoor hospitality and restart of major events.

However, the figures also revealed that online spending decreased in April, down from 34.7% in March to 30% in April as shoppers returned to high street stores after months of being banned from browsing clothing racks.

Hargreaves Lansdown analyst Susannah Streeter said: “Retailers were in dire need of a spring sales boost after a long dark winter of lockdowns, and the grand reopening delivered just that.”

That said, the ONS said they expect retail trends that have emerged during the COVID pandemic to stay, noting that online-only retailers remain the biggest benefactors of the crisis, with sales for these companies up 56% year-on-year.

Nonetheless, given that 7 in 10 UK adults have been administered their first COVID jabs and the June 21st lifting is set to go ahead, the predicted spending boom for Q2 2021 should further support high street stores.

However, the question economists are mulling over now is: how long will the spending boom last?

Will the UK’s economic boom be fleeting or long-lasting?

The British Retail Consortium’s (BRC) chief executive Helen Dickinson notes that “high street footfall is still 40% lower than pre-pandemic levels and that more than half a million retail employees remain on furlough.”

The end of the UK government’s business rates relief poses a significant risk to retail stores. At the same time, manufacturers are concerned about price pressures due to raw material shortages and higher shipping costs post-Brexit.

Even the property market, which has shown signs of cooling, continued to boom in April, with housing transactions up nearly 200% year-on-year and prices climbing.

The surge in retail sales will have added to growing fears over inflation, which rose from 0.9% in March to 1.5% in April.

Although BoE Governor Andrew Bailey believes that an inflation spike will be temporary, the latest figures on UK inflation have revived fears about runaway prices forcing central banks to raise interest rates.

New variants also threaten the UK recovery outlook, which could trigger further disruption to trade if ministers decide to reimpose COVID lockdown restrictions or delay plans to reopen on June 21st.

Yet, despite lingering risks, “the financial mood of the nation has rebounded to its pre-lockdown figure of -9 in May,” said Joe Staton, client strategy director at GfK. 

The Confederation of British Industry (CBI) has also drafted plans to revive Britain’s competitiveness by ending cross-subsidy and encouraging firms to reinvest profits into the skills of their workforce.

According to a CBI report, a monetary prize worth GBP 700BN lies in wait for UK firms and the British government if they can establish an innovation-driven partnership on key industry sectors.

News of the CBI‘s plans to end cross-subsidy comes amid news that the number of billionaires in the UK has hit record levels, despite the economic fallout from the coronavirus pandemic.

The number of billionaires in the UK soars

There have been calls for the British government to increase taxes on the super-rich after data published by the Sunday Times revealed that the number of billionaires in the UK hit 171 – 24 more than the previous year.

The Sunday Times noted that it was the highest number recorded since the list began thirty-three years ago and that the combined wealth of these individuals grew by more than a fifth during the past year.

The top ten wealthiest in the country include the CEOs of Ocado, BooHoo, The Hut Group (THG) and ASOS, all of which benefited from the massive increase in online spending amid coronavirus lockdown measures.

Ukrainian-born businessman, Sir Len Blavatnik, became Britain’s richest man after he sold a GBP 7.2BN stake in his oil company, which propelled his fortune to GBP 23BN.

However, the boom in Britain’s billionaires, which came about during a year of widespread financial hardship, has prompted calls for the UK government to reform taxation on the rich.

IPPR Economic Justice Head George Dip slammed the current tax system, stating that “there is a massive structural flaw in the economy” given that the economic shock delivered by COVID-19 has only seen “the wealthy get wealthier.”

The IPPR has urged ministers to raise taxes on all income from Britain’s wealthiest individuals, including capital gains, land and inheritance.