POLL-Britain's economy racing as lockdown lifts, but outlook has not improved

The virus has infected almost 15 million people across the world and Britain has the highest death toll in Europe - despite the government forcing businesses to close and citizens to stay home. But many restrictions have now been eased and people are emerging from their homes, returning to work and spending money again, so the economy was expected to expand 12.2% this quarter, the July 13-21 Reuters poll showed, better than the 10.5% recovery predicted last month.

Britain will expand at its quickest pace in decades this quarter after shrinking at its fastest pace in centuries last quarter, a Reuters poll found, as vast swathes of the economy have reopened following a nationwide shutdown to control the coronavirus.

Despite near-term optimism, almost 85% of respondents, 32 of 38, thought the outlook for the British economy had stayed the same or worsened over the past month, with only six saying it had improved. The virus has infected almost 15 million people across the world and Britain has the highest death toll in Europe - despite the government forcing businesses to close and citizens to stay home.

But many restrictions have now been eased and people are emerging from their homes, returning to work and spending money again, so the economy was expected to expand 12.2% this quarter, the July 13-21 Reuters poll showed, better than the 10.5% recovery predicted last month. That bounceback comes after an historic 18.9% contraction pencilled in for last quarter and nearly all economists who responded to an extra question said the biggest threat to the recovery would be a second wave of virus infections.

"The economy will almost certainly have imploded over Q2 as a whole. The good news is that in terms of the monthly trajectory, there is clear evidence that the economy has remained on an upward path since May," said Philip Shaw at Investec. "But the challenge of course is keeping the economy from running out of steam."

This year, the economy was expected to contract 9.1%, the median in the poll of over 70 economists showed, and then recover to expand 6.0% in 2021. In a worst case scenario it will shrink 13.0% this year. Official GDP figures said the economy grew a slower than expected 1.8% in May.

To tackle the hit from COVID-19 to the economy the British government has massively ramped up spending, borrowing 128 billion pounds ($163 billion) last quarter, five times the amount during the same period last year. But only a slim majority said the Treasury's response had been enough - 14 of 25 respondents to an additional question said.

"The authorities have done broadly what they needed to do," said Peter Dixon at Commerzbank. Forming the centrepiece of the government's support was a scheme to pay 80% of wage bills if staff were put on leave rather than let go. But that is due to close in October and unemployment was seen peaking at 8.0% in the fourth quarter.

The Bank of England chopped borrowing costs to a record low of 0.10% and restarted asset purchases. But no change in policy was expected at its next meeting on Aug. 6. The bank rate will not rise until 2022, but an additional 70 billion pounds ($89 billion) will be added to the BoE's existing 745 billion pounds quantitative easing programme toward the end of this year, the poll showed.

Another risk is the expiry of Britain's transition period with the European Union at the end of the year, after leaving more than 40 years of membership in March. The two sides resumed talks on Tuesday but while there has been little movement what divides them. Still, the aim of reaching agreement on future ties by October is ambitious but achievable, German Foreign Minister Heiko Maas said on Tuesday.

As has been consistent in Reuters polls since the June 2016 vote to leave the EU, economists almost unanimously expect the eventual relationship will be a free trade deal. "Failure to sign a trade agreement with the EU in 2020 will go down as a major policy error. It is inconceivable to me that the British government would be prepared to take such a risk with the economy, particularly in the current climate," Commerzbank's Dixon said.

"But then Brexit and a rational approach to economic policy have never been natural bedfellows." (For other stories from the Reuters global economic poll: )

($1 = 0.7870 pounds)

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