- English lockdown and other COVID-19 restrictions on activity prompt November economic contraction – the first monthly decline in GDP since April.
- However, a GDP decline of 2.6% month-on-month in November represents a resilient performance given the extent of restrictions. November's GDP fall was only one-seventh of the decline of 18.8% seen in April.
- Significantly, November's decline in GDP was entirely due to the services sector where output fell 3.4% month-on-month. The services sector was most affected by COVID-19 restrictions with many hospitality and leisure activities unavailable and non-essential retailers closed.
- Impressively, both the manufacturing and construction sectors kept growing in November with respective month-on-month expansions of 0.7% and 1.9% (although overall industrial production edged down 0.1% month-on-month as the rise in output was countered by a fall in mining & quarrying output and energy output). Lessons learned in keeping activity going in the previous lockdown have helped, while many manufacturing plants and construction sites have been made compatible with social distancing requirements.
- On the expenditure side, it looks certain that consumer spending contracted in November given that retail sales volumes fell 3.8% month-on-month. There was clearly a decline in spending on consumer services due to hospitality and leisure closures.
- The EY ITEM Club suspects the economy could have seen a further GDP decline in December with restrictions still in place and tightening towards the end of the month.
- Given the surprisingly small GDP drop in November, the EY ITEM Club estimates that GDP contracted around 0.8% quarter-on-quarter in Q4 2020, half the 1.6% quarter-on-quarter fall previously anticipated for the quarter. This would result in overall 10.3% contraction in 2020.
- With lockdowns across the UK back in place and set to last until at least mid-February at least, the EY ITEM Club expects the economy will experience a clear contraction in Q1 – possibly in the region of 3-4% quarter-on-quarter. This would result in a double dip recession.
- After Q1, the EY ITEM Club expects the economy to benefit progressively through 2021 from the roll-out of COVID-19 vaccines. Consumers look well-placed to play a key role given the recent high savings ratios, although much will depend on unemployment numbers. After an extended period of weakness, business investment is expected to gain momentum over the course of the year as companies grow more confident in the economy.
- However, the EY ITEM Club’s December forecast of 6.2% GDP growth for 2021 is now clearly too optimistic: 5.0% growth may well now be the limit for 2021.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“It’s no surprise that six consecutive months of economic growth came to an end in November, given the impact of that month’s English lockdown and other major restrictions on activity.
“That said, GDP contraction of 2.6% month-on-month in November looks to have been a resilient performance given the scale of the restrictions the economy faced. These included the closure of non-essential retailers as well as the shutting down of most of the hospitality and leisure sectors, as well as increased limits on people’s movements.
“November’s GDP contraction is less than one-seventh of the 18.8% month-on-month decline in GDP seen in April in the immediate aftermath of the lockdown which started at the end of March.
“It is notable that the UK economy had showed signs of losing momentum even before November as increased restrictions on activity amid rising COVID-19 cases affected October’s economic performance. Meanwhile, uncertainties over the future UK-EU relationship after 31 December were also likely to have affected the economy. Positively, near-term unemployment concerns had been eased by the extension of the furlough scheme through to March and, subsequently, April.
“Prior to November’s contraction, GDP growth had moderated to a five-month low of 0.6% in October from 1.1% in September, 2.1% in August, 6.5% in July and a peak of 9.3% in August.
“The three-month/three-month growth rate in GDP slowed to 4.1% in November from 10.5% in October and 16.0% in September.
“The year-on-year decline in GDP edged back out to 6.9% in November after narrowing to 6.8% in October from 7.1% in September, 8.1% in August. 10.0% in July and a record 24.6% in April.”
“GDP in November was 8.5% below its February level before the economy started contracting in response to the impact of COVID-19.”
November GDP decline entirely due to services sector
Howard Archer continues: “The services sector predictably saw the most significant impact from November’s lockdown and other restrictions. Output contracted 3.4% month-on-month. The fall in services output was reported widespread across sectors in November. Particularly notable drops occurred in the accommodation and food services sectors, wholesale and retail trade, and entertainment & recreation sectors. However, education output only fell 1.3% month as most schools, colleges and universities remained open.
“Impressively, both the manufacturing and construction sectors kept growing in November. Lessons learned in keeping activity going in the previous lockdown will have helped. Meanwhile, many manufacturing plants and construction sites have been made compatible with social distancing requirements.
“Manufacturing output rose 0.7% month-on-month in November, with output reportedly rising in eight out of 13 sub-sectors. The strongest performance occurred in the motor sector. There appears to have been a boost to manufacturing activity from stockpiling and increased demand from the EU ahead of the ending of the UK-EU transition arrangement on 31 December.
“However, overall industrial production edged down 0.1% month-on-month overall in November as the 0.7% rise in manufacturing output was countered by month-on-month drops of 2.3% in energy output and 3.4% in mining & quarrying.
“Construction output climbed 1.9% month-on-month in November, led by housebuilding which has benefitted from the recent robust housing market activity and firming of prices. There was also a rise in infrastructure output.”
Economy may have seen further decline in GDP in December as restrictions remained tight after ending of lockdown
Howard Archer observes: “The EY ITEM Club suspects the economy could have seen a further GDP decline in December. While the second English lockdown ended in early December, new restrictions were then introduced and then further tightened late on in the month.
“Notably, the Office for National Statistics reported that the proportion of businesses open in the UK fell to 71% over 14-27 December from 84% during 30 November – 13 December.
“The purchasing managers reported that joint manufacturing and services output edged up in December, while there was decent construction output.
“Meanwhile, consumer spending seems to have been limited in December as non-essential retailers in most areas were closed anew after briefly re-opening, and much of the hospitality and leisure sectors remained shut. Barclaycard reported consumer spending was down 2.3% year-on-year in December while the BRC reported growth in retail sales was limited to 1.8% year-on-year.”
Outlook for UK economy in 2021
“The EY ITEM Club now estimates that the economy contracted around 0.8% quarter-on-quarter in the fourth quarter, which would result in an overall UK GDP contraction of 10.3% in 2020.
“With lockdowns across the UK back in place and set to last until at least mid-February at least, the EY ITEM Club expects the economy will have a challenging start to 2021 and will experience clear contraction in the first quarter. The forecast is for a first quarter decline in GDP in the region of 3-4% quarter-on-quarter. This would result in a double dip recession.
“The current GDP growth forecast of 6.2% for 2021 is now clearly too optimistic given the likely difficult first quarter. Five per cent growth may well now be the limit for the year.
“After the first quarter, the EY ITEM Club believes the economy can still see substantial improvement as it benefits progressively from the roll-out of the COVID-19 vaccines. Consumers look well-placed to play a key role in the anticipated recovery given the recent high savings ratios, although much will depend on how much unemployment ultimately rises. After an extended period of weakness and likely cautious start to the year, business investment is expected to gain momentum as companies grow more confident in the economy.
“Despite the UK and EU reaching a Free Trade Agreement which has avoided the imposition of tariffs on goods trade between the two, UK trade will be substantially affected by the fact that the UK has now left the EU’s Single Market and Customs Union. This will result in increased non-trade barriers in the form of additional customs requirements and some regulatory changes.”