Press release

12 Nov 2020 London, GB

UK economy bounced back strongly in Q3 from record Q2 contraction – EY ITEM Club comments on latest GDP figures

The economy saw a bounce back in Q3 2020 as it benefitted from reduced lockdown restrictions releasing pent-up activity

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Related topics Growth COVID-19
  • Strong bounce back in Q3 as the economy benefitted from the progressive easing of restrictions on activity from mid-May through to July, as well as additional government stimulus measures, particularly those supporting the hospitality sector
  • However, growth of 15.5% quarter-on-quarter (q/q) in Q3 was insufficient to offset record q/q contraction of 19.8% in Q2 and 2.5% in Q1. GDP was still down 9.6% year-on-year in Q3 2020, while the UK economy was still 9.7% smaller in Q3 2020 than it had been in Q4 2019
  • GDP grew 1.1% month-on-month in September, which was a fifth successive month of expansion albeit the slowest. As a result of September’s growth, GDP is now 22.9% higher than it was in April. All output sectors saw expansion in September and robust q/q growth over Q3: services (14.2%), industrial production (14.3%) manufacturing output (18.7%), and construction (41.7%)
  • On the expenditure side, consumer spending led the bounce back as it increased 18.3% q/q. Consumer spending was buoyed by the release of pent-up demand as the retail sector was fully open and restrictions on the hospitality sector and other consumer services were eased. Consumers’ ability to spend was helped by ongoing support from the furlough scheme as well as the rise in the savings ratio in Q2
  • Business investment rose 8.8% q/q, but this was a modest rebound after a record decline of 26.5% in Q2 – with many companies concerned about cash flow, substantially reduced activity, and uncertain over future prospects – and also a decline of 0.5% in Q1. This meant that business investment in Q3 was 20.5% below its level in Q4 2019. Business investment was notably 20.5% below its Q4 2019 level
  • The impact of the national lockdown and other restrictive measures on economic activity in Q4 2020 should be markedly less than occurred in April and overall in Q2 2020 following the March restrictions
  • The EY ITEM Club forecasts there could be GDP contraction around 4% in Q4. This would result in overall GDP contraction around 11.5% in 2020
  • The Chancellor’s extension of the furlough scheme to the end of March should limit the near-term rise in unemployment and help activity, while there could be some boost to economic activity from stockbuilding ahead of the UK-EU transition arrangement on 31 December

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

“The economy saw a bounce back in Q3 2020 as it benefitted from reduced lockdown restrictions releasing pent-up activity. It also gained some help from stimulus measures, including the temporary raising of the stamp duty threshold for house purchases, the VAT cut for the hospitality sector from mid-July, and the ‘Eat Out to Help Out’ scheme in August.

“There was also a boost to Q3 GDP growth from the education sector. In Q2, the sector’s output contracted 27.6% q/q as schools were closed. However, with the school holidays occurring in July and August and schools reopening in September, there was a substantial rebound in the Q3 figures as education output rose 25.3% q/q.

“Despite record 15.5% q/q GDP growth in Q3, this was insufficient to offset q/q contraction of 19.8% in Q2 and 2.5% in Q1. Consequently, the UK economy was still 9.7% smaller in Q3 2020 than it had been in Q4 2019. The year-on-year fall in GDP narrowed to 9.6% in Q3 from 21.5% in Q2.

“The economy grew through Q3 with GDP expansion of 1.1% month-on-month in September following growth of 2.2% in August and 6.3% in July. In fact, September was a fifth successive month of expansion, although it was the slowest. All output sectors saw expansion in September: services (1.0%), industrial production (0.5%) with manufacturing output up 0.2%, and construction (2.9%). As a result of September’s growth, GDP is now 22.9% higher than it was at April’s low.”

All output sectors saw a marked rebound in Q3

Howard Archer continues: “There was a substantial q/q rebound across all output sectors in Q3, too. Output in the dominant services sector rose 14.2% q/q following falls of 19.2% q/q in Q2 and 2.6% in Q1. The fastest rebounds occurred in the education, wholesale and retail trade and repair of motor vehicles and motorcycles. Accommodation and food services also made a significant contribution as the sector opened up from July.

“Industrial production grew 14.3% q/q, with manufacturing output expanding 18.7% q/q. This followed respective declines of 16.3% q/q and 21.1% q/q in Q2 and 2.1% and 1.8% in Q1. Manufacturing output was lifted by factories being largely fully open through Q3 after widespread shutdowns during the lockdown period in Q2. There were increase in 12 out of the 13 manufacturing sub-sectors, most notably the manufacture of transport equipment.

“Construction output grew 41.7% q/q in Q3 after a decline of 35.7% q/q in Q2 which followed a fall of 2.8% in Q1. Private new house work rebounded particularly strongly in Q3.”

Consumers play leading role in economy’s bounce back but business investment remains weak link

Howard Archer continues: “On the expenditure side, robust consumer spending led the way, while there were also positive contributions from government spending, investment in dwellings and stocks. Business investment expanded but was soft while net trade was negative as imports of goods and services rose far more than exports.

“Consumer spending increased 18.3% quarter-on-quarter in Q3 after contracting 23.6% in Q2 and 3.0% in Q1. The full opening up of the retail sector during June released pent-up demand while the opening up of the hospitality sector and other consumer services from early July further fueled consumer spending. Meanwhile, consumers’ ability to spend was helped by ongoing support from the furlough scheme, as well as the rise in the household savings ratio in Q2 to a record 29.1% from 9.6% in Q1.

“Overall investment rose 15.1% q/q in Q3 after falls of 21.6% q/q in Q2 and 1.0% in Q1. This was primarily due to a jump 68.5% in private dwellings investment. Business investment remained a weak link in the economy; while it rose 8.8% quarter-on-quarter, this was a modest rebound after a record decline of 26.5% in Q2 and also a decline of 0.5% in Q1. This meant that business investment in Q3 was 20.5% below its level in Q4 2019. Many companies were experiencing reduced activity and had cash flow concerns, as well as being uncertain over future prospects. Government investment dipped 1.9% q/q in Q3 after jumping 19.3% in Q2.

“Government spending rebounded 7.8% q/q in Q3 after declining 14.6% q/q in Q2 and 3.9% q/q in Q1. This largely reflected a rebound in spending on education and health.

“There was a positive impact from the inventories component which includes alignment and balancing adjustments. However, the ONS reported that the underlying data show that stocks held by UK companies fell by £58 million in Q3. This partly reflected the impact of oil prices on the mining and quarrying, electricity and gas, and water supply industries. There is also survey evidence which suggests a decrease in inventories held in other industries such as motor trades.

“Net trade made a major negative contribution to Q3 GDP, which largely reversed the substantial positive contribution that had occurred in Q2. Exports of goods and services rose 5.1% q/q in Q3 after declines of 11.0% in Q2 and 10.7% in Q1 as most countries experienced recoveries and global trade improved. However, imports rose 13.2% q/q in Q3 following a substantial fall of 20.5% q/q in Q2 and a decline of 4.1% in Q1 as UK domestic demand recovered substantially.”

Economy set for renewed contraction in fourth quarter with new national lockdown in England

Howard Archer adds: “There seems little doubt that a renewed national lockdown will cause the economy to contract again in Q4 – and, very possibly, by an appreciable amount. The EY ITEM Club forecasts there could be GDP contraction around 4% in Q4. This would result in overall GDP contraction around 11.5% in 2020. Much will depend on what happens after 2 December, whether the lockdown continues and what the following tiered local restrictions will be.

“The EY ITEM Club has modestly reduced the expected decline in GDP in Q4 due to the Chancellor extending the furlough scheme to the end of March. This move should limit the rise in unemployment likely to occur in Q4. The extension and increase in the self-employment grant will also help.

“Even before a new national lockdown in England – as well as varying measures announced so far in Scotland, Wales and Northern Ireland – Q4 was looking more challenging for the UK economy. It was looking likely there would be a marked rise in unemployment after the original October end-date of the furlough scheme, even allowing for the generous government job support measures which had been announced. On top of that, business caution has been increased by uncertainties over whether the UK and EU will reach a trade agreement by 31 December.

“There were already signs of the economy losing momentum in October with local restrictions being imposed.

“However, the EY ITEM Club doubts that any upcoming GDP contraction will be as much as was seen in April and over Q2. The new lockdown measures are less restrictive than those introduced in March, and schools being kept open will make it easier for people with children to keep working – and it means there will not be the large decrease in education output that weighed on GDP in Q2.

“Hopefully some lessons have been learned and experience gained in keeping activity going during the renewed lockdown. People are more used to working at home and companies used to operating with them doing so. In addition, many workplaces have been adjusted to meet the social distancing requirements. This includes construction sites and manufacturing plants which the Government has stressed it wants to keep operating.

“There could also be some support to economic activity in Q4 from stockbuilding as a consequence of uncertainties around the future trade relationship of the UK and EU.

“Nevertheless, the impact of the English lockdown and other restrictions on the economy is likely to be considerable, and some sectors will undoubtedly be negatively affected, most obviously hospitality.”