Press release

11 Mar 2020 London, GB

UK economy started off 2020 disappointingly with flat GDP in January

Disappointing news for the UK economy as GDP was flat month-on-month in January.

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  • Disappointing news for the UK economy as GDP was flat month-on-month in January. This defies hopes that improved business and consumer confidence after December’s decisive election result would translate into improved economic activity at the start of 2020.
  • GDP was flat on a three-month/three-month basis in January, as it had been in December.
  • GDP was flat month-on-month in January as construction output contracted 0.8% month-on-month and industrial production edged down 0.1%. The fall in industrial production was primarily due to a sharp drop in utilities output, with manufacturing output managing to eke out a 0.2% gain. Output in the dominant services sector edged up 0.1% month-on-month.
  • With the economy seeing a subdued start to 2020 and the coronavirus expected to further impact activity, the EY ITEM Club has revised its 2020 GDP growth forecast down to 0.5% from 1.2%.
  • The economy seems to have had a mixed February. The purchasing managers reported clear expansion across the services, manufacturing and construction sectors. However, some purchasing managers reported supply chain disruptions impacting the manufacturing sector and export orders being affected. Meanwhile, survey evidence points to soft consumer spending in February as it was affected by bad weather and some coronavirus concerns. 
  • The impact may be felt further in March. The sharp sell-off in equity markets is also likely to have a negative impact. While there could be some lift to consumer spending from the panic buying, this is likely to be outweighed by people going less to the shops and also not going out so much to restaurants, the cinema, etc. 
  • Some help to affected businesses and workers will come from Government measures announced in the Budget while the Bank of England has cut interest rates to 0.25% from 0.75%, as well as announcing measures to support bank lending to small businesses. The sharp fall in oil prices should also give some help to consumer purchasing power. However, levels of consumer spending and business investment are likely to held back. Meanwhile, reduced global activity and trade may limit exports.
  • Supportive fiscal policy, likely decent fundamentals for consumers and a gradual pick-up in business investment should allow the economy to pick up once the Coronavirus impact fades.   
  • However, it is possible that the upside for UK economic activity in the final months of 2020 will be limited by uncertainties over the UK-EU relationship with the transition arrangement due to end on 31 December.
  • We expect GDP growth to improve to 1.5% in 2021. This is based on the assumption that the UK and EU manage to achieve a bare bones Free Trade Agreement by the end of 2020.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“Disappointing news on the UK economy as GDP was only flat month-on-month in January. This defies hopes that improved business and consumer confidence after December’s decisive general election result would translate into improved economic activity at the start of 2020. It is all the more disappointing in that survey evidence had suggested that there had been some pick-up in activity.

“Year-on-year GDP growth slowed to just 0.6% in January from 1.2% in December.

“The economy had previously seen some bounce back in activity in December with growth of 0.3% month-on-month after a largely difficult fourth quarter as GDP – with indications that it had a better second half of the month after the decisive general election result diluted some of the uncertainties it faced. However, December’s growth only offset the 0.3% month-on-month GDP contraction suffered in November. GDP had earlier risen 0.2% month-on-month in October. Consequently, the economy had stagnated over the fourth quarter of 2019.

GDP was only flat on a three-month/three-month basis in January, as it had been in December.

“GDP was flat month-on-month in January as construction output contracted 0.8% month-on-month and industrial production edged down 0.1%. The fall in industrial production was primarily due to a sharp drop in utilities output (down 4.2% month-on-month), with manufacturing output managing to eke out a 0.2% gain (although it was down 3.6% year-on-year). Output in the dominant services sector edged up 0.1% month-on-month and was up 1.2% year-on-year.

Economic activity in February

“The economy seemingly had a mixed February. In particular, the purchasing managers reported slightly slower but clear expansion in overall services and manufacturing output in February. There continued to be reports that a lift to business investment and activity was coming from reduced political uncertainties following December’s decisive general election result and greater near-term clarity on Brexit with the UK leaving the EU on 31 January with a deal. Specifically, the composite output index for manufacturing and services edged down to 53.0 in February after rising markedly to a 16-month high of 53.3 in January from both December and November (the lowest level since July 2016). Nevertheless, February’s reading still pointed to a second month of clear expansion and was at the second highest level since September 2018. Additionally, the construction PMI improved markedly to a 14-month high of 52.6 in February from 48.4 in January, thereby marking the first expansion in the sector since last April.

“However, there were signs that the coronavirus outbreak was beginning to impact with the purchasing managers reporting supply chain disruptions affecting the manufacturing sector and export orders being affected.

“Furthermore, survey evidence points to softer levels of consumer spending in February as it was impacted by the very wet weather and some coronavirus concerns.

Economic outlook

“We have reduced our GDP growth forecast for 2020 to 0.5% from 1.2% due to the weaker-than-expected start to the year and the anticipated impact of coronavirus.

“Any forecast of the UK economy at the moment is challenging as it’s not yet known how bad the coronavirus outbreak will be in the UK and how long it will last for.

“The impact of coronavirus on the economy may increasingly show up from March, with business and consumer confidence, supply chains and demand potentially being impacted. The sharp sell-off in equity markets is also likely to have a negative impact. While there could be some lift to consumer spending from the panic buying of a number of items that has taken place, this is likely to be outweighed by people going less to the shops and also not going out so much to restaurants, the cinema, etc.

“The economy may now struggle to achieve any growth in the first quarter and there has to be a very real danger that it will contract in the second quarter.

“Some help to affected businesses and workers is set to come from government measures announced in the Budget while the Bank of England has cut interest rates to 0.25% from 0.75% as well as announcing measures to support bank lending to small businesses. The sharp fall in oil prices should also give some help to consumer purchasing power. However, consumer spending is likely to be reined in while businesses may hold back investment and some new projects. Meanwhile, reduced global activity and trade may limit exports.

“While it is likely to be marked for a while, we expect the impact on the economy to be temporary and to have no lasting damaging impact. Supportive fiscal policy, likely decent fundamentals for consumers and a gradual pick-up in business investment should allow the economy to pick up once the coronavirus impact fades.   

“However, it is possible that the upside for UK economic activity in the final months of 2020 will be limited by uncertainties over the UK-EU relationship with the transition arrangement due to end on 31 December.

“We expect GDP growth to improve to 1.5% in 2021. This is based on the assumption that the UK and EU manage to achieve a bare bones Free Trade Agreement by the end of 2020.”