- 1.0% quarter-on-quarter (q/q) GDP growth in Q4 2020 was a resilient performance given the November lockdown and other COVID-19 restrictions – although the EY ITEM Club believes the economy is headed for renewed contraction in Q1 2021. Q4’s growth outturn was double the consensus expectation of a 0.5% q/q expansion, while it had originally been expected that heightened restrictions on the economy in Q4 would lead to contraction
- The UK economy contracted 9.9% in 2020 and Q4 2020 GDP was 7.8% below its Q4 2019 peak. The economy returned to growth of 1.2% month-on-month (m/m) in December after contracting 2.3% m/m in November
- Q4 growth was driven by manufacturing and construction, with many plants and sites having been made compatible with social distancing requirements. In contrast, services output rose slightly with many hospitality and leisure activities unavailable and non-essential retailers closed for much of the quarter
- On the expenditure side of the economy, Q4 growth came from government spending and investment, a modest rise in business investment and an inventory build-up. Consumer spending contracted slightly with limited scope to spend while net trade was negative as exports rose much less than imports
- The EY ITEM Club expects the latest lockdown – which may very well last through the first quarter – to have a more significant impact on the economy than November’s restrictions. Consumers appear to be more cautious, while the purchasing managers’ surveys for the services, manufacturing and construction sectors point to contraction in January. The EY ITEM Club expects the economy will experience a clear contraction in the first quarter – possibly in the region of 4% q/q
- Beyond 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 recent high savings ratios, although much will depend on how much unemployment ultimately rises. After a slow start, business investment is expected to gain momentum over the course of the year as companies grow more confident in the economy
- The EY ITEM Club’s recent Winter Forecast sees GDP growth of 5.0% in 2021 followed by expansion of 6.5% in 2022. This means the economy regains its peak level of Q4 2019 in Q3 2022
- The EY ITEM Club suspects that the case for further Bank of England support for the economy will wane from Q2 as the recovery develops alongside the COVID-19 vaccines roll-out. Consequently, the EY ITEM Club thinks that the Bank is most likely keep interest rates at 0.10% through 2021 and the targeted stock of asset purchases at £895bn
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The economy’s fourth quarter performance was resilient and was much stronger than was originally anticipated. It had earlier seemed probable that the economy would see a renewed contraction in the fourth quarter, but it is evident that lessons have been learnt in keeping activity going amid lockdowns and other tight restrictions. Indeed, growth of 1.0% quarter-on-quarter in the fourth quarter was double the consensus forecast of 0.5% expansion.
“Despite growth in the fourth quarter, the economy contracted by 9.9% over the course of 2020 thanks to the substantial impact of COVID-19 restrictions across the year. GDP was also down 7.8% year-on-year in the fourth quarter.
“There had earlier been GDP contraction of 2.9% quarter-on-quarter in the first quarter and 19.0% quarter-on-quarter in the second when the economy was particularly affected by the introduction of the first lockdown on 23 March. The economy achieved 16.1% growth in the third quarter following the substantial easing of restrictions.
“The economy managed modest growth of 1.2% month-on-month in December after a limited contraction of 2.3% during a lockdown-affected November. It had earlier grown 0.6% month-on-month in October. Tight restrictions on activity in December limited the scope for a strong rebound. December saw services output partially rebound 1.7% month-on-month after a fall of 3.1% in November as there was some re-opening of consumer-facing services and the health sector saw robust growth. There was also modest growth in manufacturing output (0.3%). However, construction output fell 2.9% month-on-month.”
Manufacturing and construction sectors responsible for Q4 growth; services dip
Howard Archer continues: “Fourth quarter growth on the output side of the economy was driven by decent performances by the manufacturing and construction sectors which saw respective quarter-on-quarter expansions of 3.3% and 4.6%. Both sectors benefited from adjustments being made to many factories and sites to make them consistent with social distancing requirements. Additionally, there was clearly a boost to manufacturing activity in the fourth quarter from stockpiling and increased demand from the EU ahead of the ending of the UK-EU transition arrangement on 31 December. Meanwhile, construction activity was lifted by robust house building supported by a buoyant housing market.
"However, the services sector had a challenging fourth quarter with output rising just 0.6% quarter-on-quarter. Large parts of the hospitality and leisure sectors were closed for much of the quarter while non-essential retailers also saw extensive closures.”
Consumer spending fell marginally in Q4; business investment saw slight rise
Howard Archer continues: “On the expenditure side of the economy, growth in the fourth quarter was largely due to a building up of inventories and government spending. There was a modest rise in investment. Consumer spending fell slightly while net trade was markedly negative.
“Consumer spending contracted modestly – by 0.2% quarter-on-quarter – as the ability to spend was limited by the closure of hospitality, leisure and non-essential retail during much of the period.
“Overall investment rose 2.1% quarter-on-quarter in the fourth quarter. Business investment continued to recover modestly as it rose 1.3% quarter-on-quarter but it was 10.3% below its level in the same period in 2019. Many companies experienced reduced activity and had cash flow concerns, while uncertainties over future prospects – particularly with respect to whether the UK and EU would agree a Free Trade Agreement – may also have had an impact. Meanwhile, government investment rose 5.7% quarter-on-quarter in the fourth quarter,
“Government spending rose 6.4% led by increases in expenditure on health an education.
“There was a positive impact from the inventories component of the economy in the fourth quarter. This appears to have been lifted by stockpiling ahead of the ending of the UK-EU transition arrangement on 31 December.
“Net trade made a significant negative contribution to fourth quarter GDP as exports of goods and services could only edge up 0.1% quarter-on-quarter, while imports grew 8.9%. Imports may well have been lifted by some stockpiling behaviour ahead of the ending of the UK-EU transition arrangement.”