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WRAPUP 1-UK economy recovering, for now, as public borrowing mounts

Fri, 21st Aug 2020 10:44

* August PMI data rises to highest in nearly 7 years

* UK retail sales beat forecasts in July, above year-ago
levels

* Public debt rises past 2 trillion pounds

* Economists warn rebound in consumer demand may fade

By David Milliken, Andy Bruce and William Schomberg

LONDON, Aug 21 (Reuters) - Britain's economic recovery from
the shock of the COVID-19 pandemic has gathered pace, data
showed on Friday, but government borrowing rose past the 2
trillion pound ($2.64 trillion) mark and fears of future job
losses are mounting.

Retail sales rose above pre-pandemic levels in July and
August's Purchasing Managers' Index data showed the fastest
growth in almost seven years, beating economists' expectations
in both cases.

But Britain's economy still faces a long recovery after
shrinking by a record 20% in the second quarter, the largest
decline of any big country, and businesses are shedding jobs,
raising questions over how long consumers will continue their
spending spree.

"This uptick in retail consumption may help ease concerns
over the fragility of the UK economy -- but not for long," said
Alistair McQueen, head of savings and retirement at insurance
company Aviva.

Britain entered lockdown in late March and shops in England
only fully reopened on June 15. Bars and restaurants followed
suit on July 4.

Retail sales in July were 1.4% above year-ago levels and
3.0% above their level before the pandemic, according to figures
from the Office for National Statistics.

August's preliminary composite PMI, which covers most of
Britain's private sector other than retail, rose to its highest
level since October 2013, after striking a record low in April.

But a growing proportion of employers said they planned to
shed jobs and were making staff redundant rather than bringing
them back from a government-subsidised furlough scheme that
expires in October.
"Scarring from the pandemic and lingering doubts about the
sustainability of recovery resulted in a need to cut overheads,"
said Tim Moore, economics director at IHS Markit, which
publishes the PMI data.

PMI surveys for the euro zone -- where countries exited
lockdown earlier than Britain -- showed the recovery stuttering,
suggesting the impact of pent-up demand that drove an expansion
in July is already fading.

JOB LOSSES

Even within retail, different businesses have had
contrasting fortunes.

Grocery sales are 3% up on the year and online sales are 50%
higher than before the pandemic, while sales volumes at clothing
and footwear stores are 25% lower than last year.

Stores such as Marks & Spencer, Boots, John
Lewis, Dixons Carphone and WH Smith
have announced plans for thousands of job cuts.

The government has spent more than 35 billion pounds so far
on its job support scheme, the largest single measure to tackle
the economic impact of the pandemic, but has only offered
relatively small incentives for businesses to bring staff back.

The Bank of England forecasts unemployment will reach 7.5%
by year-end, almost double its most recent reading.

Friday's data laid bare the impact of increased public
spending and a slide in tax revenues on the public finances.

Government borrowing so far this financial year is 150.5
billion pounds, almost seven times higher than in the same
period in 2019 though below the 178.8 billion pounds which
government budget forecasters predicted last month.

Over the course of this year, the Office for Budget
Responsibility expects the budget deficit to reach 322 billion
pounds or 16% of GDP.

Public sector net debt exceeded 2 trillion pounds in July
for the first time, and is its highest since 1961 as a share of
gross domestic product.

Finance minister Rishi Sunak has indicated that some taxes
will need to rise over the medium term.

"Today's figures are a stark reminder that we must return
our public finances to a sustainable footing over time, which
will require taking difficult decisions," he said.

($1 = 0.7579 pounds)
(Additional reporting by Andy Bruce; Editing by Catherine
Evans)

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