- Data for the fourth quarter of 2019 seems from a different era given the unprecedented times that the economy is currently facing as coronavirus increasingly impacts on activity.
- The UK economy was confirmed having a difficult fourth quarter of 2019 in the face of particularly heightened domestic political and Brexit uncertainties.
- GDP grew 1.4% overall in 2019, which was a real yo-yo year for the economy as its performance was particularly distorted by the two scheduled Brexit deadlines (28 March and 31 October). GDP grew 0.6% quarter-on-quarter in the first quarter, contracted 0.1% in the second (the first decline since the fourth quarter of 2012), grew 0.5% in the third quarter and was then flat in the fourth quarter.
- On the output side of the economy, manufacturing contraction of 1.1% quarter-on-quarter weighed on GDP in the fourth quarter (industrial production contracted 0.7%). Construction output also contracted (albeit by a marginal 0.1%). Services output rose a modest 0.2% quarter-on-quarter.
- On the expenditure side, the economy was hampered in the fourth quarter by more cautious consumers and a renewed drop in business investment as some companies were clearly in “wait and see” mood as they waited to see what would happen in the election and on Brexit. Consumer spending was flat quarter-on-quarter – the weakest performance for four years - while business investment fell 0.5% quarter-on-quarter. There was a substantial positive contribution from net trade as exports surged 5.0% quarter-on-quarter while imports edged up 0.4%. However, this was distorted by large movements in trade in non-monetary gold.
- The economy suffered a disappointing start to 2020, even before coronavirus started to impact. Although reduced uncertainties arising from December’s decisive General Election result and the UK leaving the EU with a deal on 31 January underpinned marked improvement in business and consumer confidence, this failed to translate into markedly healthier economic activity at the start of 2020. Indeed, GDP was only flat month-on-month in January while data and surveys for February are mixed.
- The UK economy has increasingly been impacted by coronavirus as March has progressed, culminating in the government imposing a lockdown on 23 March. This means that GDP is likely to have contracted by around 0.5% quarter-on-quarter in the first quarter.
- With the UK lockdown likely to continue through the second quarter, we expect the economy to see GDP contraction of around 12% quarter-on-quarter in the second quarter with consumer spending declining by a similar amount and business investment falling. Exports are also expected to be hit by the impact on activity in important overseas markets such as the EU and US.
- While there is no denying that there are substantial downside risks, we believe the economy can start to recover in the third quarter and then see a further pick-up in activity late in the fourth quarter. This is on the assumption that coronavirus peaks during the second quarter and the Government starts to relax some of the restrictions on people’s movements and on business activity during the third quarter. Nevertheless, GDP is expected to contract 5.8% over 2020.
- The substantial fiscal and monetary stimulus that has been enacted should provide serious support to activity once the coronavirus impact starts to wane while consumer purchasing power should benefit from very low inflation. There should also be a fair degree of pent-up demand following the fall in consumer spending in Q2 2020 due to the lockdown. Global economic activity should also be markedly stronger in 2021 as other economies recover from the impact of coronavirus. Consequently, we believe the UK economy could grow by 4.2% in 2021.
Current account deficit narrowed markedly in fourth quarter of 2019 to lowest level since 2012
- Welcome news saw the current account deficit narrow markedly in the fourth quarter from the elevated levels over the first half of 2019. Specifically, the current account deficit narrowed to £5.6 billion (1.0% of GDP) in the fourth quarter; this was the lowest deficit since the second quarter of 2011 and was down from deficits of £19.9 billion (3.6% of GDP) in the third quarter, £23.0 billion (4.2% of GDP) in the second quarter and £35.3 billion (6.4% of GDP) in the first quarter of 2019.
- Overall the current account deficit was £83.8 billion (3.8% of GDP) in 2019, little changed from £82.9 billion (3.9% of GDP) in 2018.
- The current account was helped in the fourth quarter by the trade balance moving into a rare surplus of £8.0 billion. However, this was substantially the result of exports being boosted by exports of non-monetary gold.
- The underlying picture on the current account was weaker than implied by the headline figure. Nevertheless, another positive development saw that shortfall on the primary income account narrow to £7.1 billion in the fourth quarter from £9.7 billion in the third. This was primarily due to lower payments to foreign investors on their investments in the UK while UK earnings on their foreign investments were flat.
- Despite the improvement in the fourth quarter of 2019, the current account deficit remains a potential source of vulnerability for the UK economy – particularly if there is any major loss of investor confidence in the UK for any reason.
- Indeed, the recent marked weakening of sterling (it sank to a 30-year low against the dollar and an 11-year low against the euro) was partly attributed to the UK's large current account deficit when the market was favouring the least risky currencies.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
The Office for National Statistics confirmed that the UK economy stagnated in the fourth quarter of 2019 as GDP was flat quarter-on-quarter. This meant that GDP growth was 1.4% in 2019, which was slightly up from 1.3% in 2018, which had been the weakest performance since 2012.
Fourth-quarter-stagnation continued the yo-yo performance of the UK economy through 2019 as activity was distorted by a number of factors, most notably the two scheduled Brexit deadlines of 28 March and 31 October. The economy was held back in the fourth quarter by particularly heightened domestic political uncertainties with the General Election taking place on 12 December as well as elevated Brexit uncertainties.
Flat GDP in the fourth quarter of 2019 followed growth of 0.5% quarter-on-quarter in the third quarter, contraction of 0.2% in the second (the first decline since the fourth quarter of 2012) and growth of 0.7% in the first quarter (revised up from 0.6%).
Year-on-year GDP growth slowed to 1.1% in the fourth quarter of 2019 from 1.3% in the third quarter.
Consumers cautious in fourth quarter and business investment fell
The fourth-quarter component breakdown of the expenditure side of the economy shows that consumers were cautious in their spending and reined it in, while business investment contracted again. There was a substantial positive contribution (1.6 percentage points) from net trade. However, this was distorted by large movements in trade in non-monetary gold, which in turn weighed down on gross fixed capital formation which was negative.
Specifically, consumer spending was flat quarter-on-quarter in the fourth quarter, which was the weakest performance for four years. This was despite the fact that consumers seemingly benefitted in the fourth quarter from reasonable fundamentals as the ONS reported that compensation of employees rose 0.6% quarter-on-quarter and 3.6% year-on-year. Indeed, heightened consumer caution in the fourth quarter was highlighted by the household savings ratio rising to 6.2% from 5.0% in the third quarter.
Disappointing but hardly surprising news – given major Brexit, UK domestic political and global economic uncertainties – saw business investment contract again in the fourth quarter (by 0.5% quarter-on-quarter) after rising over the previous three quarters. Even so, business investment was up 1.8% year-on-year in the fourth quarter.
Overall investment fell 1.2% quarter-on-quarter in the fourth quarter and was down 0.3% year-on-year. In addition to the 0.5% drop in business investment, there was a decline of 1.2% in government investment. There was contraction of 3.3% quarter-on-quarter in private dwellings investment.
Government spending jumped 1.5% quarter-on-quarter and was up 3.6% year-on-year.
Net trade made a substantial positive contribution to fourth quarter growth. Exports surged 5.0% quarter-on-quarter while imports edged up 0.4%. However, this was distorted by large movements in trade in non-monetary gold.
Marked manufacturing contraction held back economy in fourth quarter; services activity soft
On the output side of the economy, fourth-quarter GDP was held back by manufacturing contraction of 1.1% quarter-on-quarter as the sector extended its largely difficult performance over the year. Overall industrial production contracted 0.7% quarter-on-quarter.
Output in the dominant services sector rose 0.2% quarter-on-quarter in the fourth quarter. Output in the distribution, hotels and catering sector was particularly weak, contracting 0.4% quarter-on-quarter. Output in the business, services and finance sector rose 0.2% quarter-on-quarter.
Construction output edged down 0.1% quarter-on-quarter.
Economy was lacklustre in first quarter of 2020 even before coronavirus started to impact
The hope had been that the UK economy would see a decent start to 2020 as reduced uncertainties following December’s decisive election – reinforced by near-term clarity on Brexit with the UK leaving the EU with a deal on 31 January – would lead to businesses and consumers stepping up their activity. There was certainly a marked pick-up in both business and consumer confidence in late December and the start of 2020.
However, ONS data show that GDP was disappointingly only flat month-on-month in January. Year-on-year GDP growth slowed to just 0.6% in January from 1.2% in December. Furthermore, data and survey evidence for February are somewhat mixed. The purchasing managers reported decent manufacturing, services and construction growth, but there was a disappointing 0.3% month-on-month drop in retail sales volumes.
