Press release

10 Dec 2020 London, GB

UK economy hampered in October by increased restrictions on activity – EY ITEM Club comments on latest GDP figures

UK economy hampered in October by increased restrictions on activity – EY ITEM Club comments on latest GDP figures

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Related topics COVID-19 Growth
  • GDP grew 0.4% month-on-month in October – by far the slowest monthly expansion since the economy returned to growth in May
  • All output sectors expanded in October but growth in services output was limited to just 0.2% month-on-month as the hospitality and leisure sectors were increasingly subject to restrictions. Manufacturing output (up 1.7%) and construction output (up 1.0%) held up better
  • The economy appears to have shown considerable resilience in November amid the English lockdown and other restrictions. The EY ITEM Club now expects GDP may have contracted by no more than 5% month-on-month in November. By contrast, the economy contracted 19.5% in April
  • The EY ITEM Club expects the return to growth in December to be affected by continuing restrictions on activity, but the Q4 GDP contraction is now forecast to be limited to around 2% quarter-on-quarter. This would mean an overall GDP contraction of 11.2% over 2020
  • The EY ITEM Club’s latest forecast sees GDP growth of 6.2% in 2021 as the economy increasingly benefits from COVID-19 vaccine developments. The forecast assumes the UK and EU ultimately agree a Free Trade Arrangement before 31 December
  • The EY ITEM Club forecasts GDP growth of 4.3% in 2022, but the economy is not expected regain its Q4 2019 level until the second half of 2023
  • If the UK and the EU do not reach a free trade agreement by 31 December, the EY ITEM Club expects growth in 2021, at least, will be significantly affected – GDP growth of 5.0% is forecast in 2021 and 3.5% growth is forecast in 2022

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

“The economy got off to a slow start to the fourth quarter as it was affected by increasing pandemic-related restrictions on activity during October.

“GDP grew 0.4% month-on-month in October, which was the weakest expansion since the economy returned to growth in May after contracting 19.5% month-on-month in April in the immediate aftermath of the 23 March lockdown. October’s growth was down from 1.1% in September, 2.2% in August, 6.3% in July and 9.1% in June.

“Nevertheless, October’s modest growth took GDP 23.4% above April’s low. It was still 7.9% below February’s level.

“The year-on-year decline in GDP slowed slightly to 8.2% in October from 8.4% in September, 9.3% in August. 11.3% in July and a record 25.1% in April.    

“The underlying slowdown in the economy was highlighted by the three-month/three-month growth rate moderating to 10.2% in October from 15.5% in September.

October slowdown primarily due to services sector

Howard Archer continues: “October’s slowdown in activity was most evident in the services sector where output edged up 0.2% month-on-month. The services sector was primarily held back by hospitality venues increasingly being closed as a result of COVID-19 restrictions. Indeed, the ONS reported that activity grew in October in 11 out of 14 services sub-sectors, but output fell 14.4% in the accommodation and services sub-sector. Services output was down 8.8% year-on-year in October.

“Industrial production rose 1.3% month-on-month in October, with manufacturing output climbing 1.7%. Eleven out of 13 manufacturing sub-sectors achieved growth in October, led by the manufacture of transportation equipment. There have been indications that the manufacturing sector is benefiting from stockbuilding and increased demand from abroad ahead of the UK-EU transition arrangement ending on 31 December. Industrial production was down 5.5% year-on-year in October with manufacturing output down 7.1% 

“Construction saw output rise 1.0% month-on-month. Private housebuilding slipped back in October, having recently played a leading role in the sector’s recovery. Housebuilding has been benefitting from the housing market seeing a substantial pick-up in activity and prices in recent months, although uncertainties remain about the market’s longer-term outlook. Construction output was down 7.7% year-on-year.”

Economy seems to have been resilient in November despite English lockdown

Howard Archer observes: “The economy seems to have shown considerable resilience in November despite the English lockdown and other restrictions. It is clear November did not see anything like the contraction experienced in April, and it also increasingly looks like the GDP contraction in November was markedly less than it was originally expected to be.

“Survey evidence from the purchasing managers points to manufacturing and construction activity continuing to expand in November, while the overall contraction in services activity appears to have been limited with the weakness mainly in the hospitality, leisure and tourism sectors. Retail sales have clearly been affected, but online sales have taken some of the slack. Survey evidence from the BRC indicates retail sales rose 0.9% year-on-year while Barclaycard data shows a 1.9% year-on-year drop in consumer spending.

“November’s lockdown measures were less extensive than those introduced on 23 March, and schools being kept open made it easier for people with children to keep working. With schools, colleges and universities all staying open, there will also not have been the large decrease in education output that weighed on GDP in the second quarter. Education output contracted 27.6% quarter-on-quarter in the second quarter after a decline of 8.4% in the first quarter.

“Additionally, experience has been gained in keeping activity going. People and companies have got used to home working, while some workplaces and offices have been adjusted to meet COVID-19 health and safety requirements. This includes construction sites and manufacturing plants, which the Government stressed it wanted to keep operating through the November lockdown.

“There is also evidence of an appreciable lift to manufacturing activity coming from stockbuilding ahead of the UK-EU transition arrangement on 31 December while the extension of the furlough scheme to the end of March should limit the near-term rise in unemployment and help activity.

“Consequently, the EY ITEM Club now suspects GDP may have contracted by no more than 5% month-on-month in November. While the post-lockdown pick-up in economic activity in December will be limited by ongoing restrictions on activity, the fourth quarter GDP contraction is now likely to be no more than 2% quarter-on-quarter. This is half the 4% quarter-on-quarter decline the EY ITEM Club had originally anticipated. GDP is now forecast to contract 11.2% overall in 2020.”

Outlook for UK economy in 2021

Howard Archer adds: “The EY ITEM Club’s latest forecast sees 6.2% GDP growth in 2021 with the economy benefitting from COVID-19 vaccine developments and assumes the UK and EU will avoid a no-deal outcome at the end of 2020. Even so, there is expected to be some limiting impact on trade and growth in 2021 from the changed relationship with the EU as the UK will no longer have access to the Single Market and Customs Union.

“The forecast assumes that a little growth has been pulled into 2021 from 2020 by the lockdown in England and other restrictions on activity introduced during the fourth quarter 2020. It also assumes that the extension of the jobs furlough scheme until the end of March 2021 will have some limiting impact on the rise in unemployment, which will be supportive to economic activity. After an extended period of weakness, business investment is expected to gain momentum as the year progresses as companies become more confident in the economy, helped by the vaccine programme. 

“GDP growth is then seen at 4.3% in 2022, but the economy is not seen regaining its fourth quarter 2019 level until the second half of 2023.”

Outlook for UK economy if no UK-EU trade deal

Howard Archer concludes: “Should the UK and the EU not reach a free trade agreement over the coming days and trade between the UK and the EU takes place under World Trade Organization rules from 1 January 2021, the EY ITEM Club believes that growth in 2021, at least, will be significantly affected. In this scenario, the EY ITEM Club forecasts GDP growth at 5.0% in 2021 and 3.5% in 2022.”