- The UK economy was less affected by lockdown in January than some had forecast, with GDP contracting 2.9% month-on-month (m/m). The consensus had expected a decline of around 5% m/m. Nevertheless, January’s fall was modestly more than the 2.3% m/m decline in GDP seen in November during the previous lockdown and was the largest monthly fall in GDP since last April
- January's contraction was primarily due to the services sector, where output fell 3.5% m/m with hospitality and leisure businesses and non-essential retailers closed. There was a 16.3% m/m decline in education services. However, there was large growth in health output
- Unlike November, manufacturing output declined in January (by 2.3% m/m) as activity was adversely affected by supply chain disruptions. However, construction output managed to keep growing, by 0.9% m/m
- On the expenditure side of the economy, it appears that consumers were markedly more cautious in January and that their spending contracted appreciably given that retail sales volumes fell 8.2% m/m while scope to spend on hospitality, leisure and consumer services was curtailed
- Positively, survey evidence (particularly PMI data) suggests that economic activity came off its January lows in February, despite the ongoing lockdown, as a continuing rapid roll out of the COVID-19 vaccines boosted consumer and business confidence. There are signs that consumers were more prepared to spend in February, although their ability to consume was still limited
- The EY ITEM Club had expected the economy to contract by 3-4% quarter-on-quarter (q/q) in Q1 2021, but the decline may now be no more than 2% q/q given the smaller-than-expected January decline
- After Q1, the EY ITEM Club expects the economy to benefit progressively through the year as the roll-out of COVID-19 vaccines facilitates the easing of restrictions in line with the government's road map and boosts consumer and business confidence
- The EY ITEM Club currently forecasts 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 around mid-2022
- However, the EY ITEM Club says it is likely to revise up its 2021 growth projection of 5.0% given today’s figures.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The latest lockdown measures had a significant impact on the economy in January with the economy contracting 2.9% month-on-month. However, this was significantly less than the consensus expectation of a decline around 5% month-on-month.
“January’s decline in GDP was modestly more than the 2.3% month-on-month fall in GDP that occurred in November when earlier lockdown measures were in place.
“However, the economic impact of the latest lockdown has been substantially lower than the impact of the lockdown measures introduced in March last year. January’s contraction was less than one-sixth of the 18.8% month-on-month contraction seen in April 2020. Experience has clearly been gained in keeping activity going.
“GDP was down 9.5% year-on-year in January compared to a decline of 6.5% in December.
“With lockdown measures in place in two out of the three months, GDP was down 1.7% in the three months to January compared to the three months to October.”
January GDP fall primarily due to services sector but was also decline in manufacturing output
Howard Archer continues: “Predictably, the services sector was the most affected by January’s restrictions and output contracted 3.5% month-on-month and 10.4% year-on-year. Non-essential retailers were closed, while restrictions limited activity for many consumer-facing businesses, particularly those in hospitality, leisure or travel.
“Significantly, there was a decline of 16.3% month-on-month in education services as schools were closed. On the positive side, health made a large contribution to growth in January 2021, increasing by 8.7% month-on-month, mainly through COVID-19 testing and tracing, and the vaccines.
“Both the manufacturing and construction sectors have been helped by lessons being learned in keeping activity going in the first lockdown as well as many manufacturing plants and construction sites being made compatible with social distancing requirements.
“Nevertheless, manufacturing output fell in January, in contrast to November when it managed to keep growing. Specifically, manufacturing output dipped 2.3% month-on-month in January, with output reportedly falling in nine out of 13 sub-sectors. The weakest performance occurred in the transport equipment sector (where output fell 11.1% month-on-month). There are reports that manufacturing activity was affected in January by supply chain issues caused by transport delays – particularly at ports – following the end of the Brexit transition period as well as COVID-19 restrictions. Overall, industrial production fell 1.5% month-on-month in January.
“Construction managed to keep expanding with output up 0.9% month-on-month. This was led by private commercial and infrastructure work.
“On the expenditure side of the economy, it appears that consumers were more cautious in January and that their spending contracted appreciably. Retail sales volumes fell 8.2% month-on-month while scope to spend on hospitality, leisure and consumer services was curtailed.”
Howard Archer concludes: “The EY ITEM Club has been expecting the economy to contract around 3-4% quarter-on-quarter in the first quarter. However, the smaller-than-expected decline in GDP in January suggests that the first-quarter contraction could be no more than 2% quarter-on-quarter.”
“After this, the EY ITEM Club expects the economy to benefit progressively through 2021 as the roll-out of COVID-19 vaccines facilitates the easing of restrictions in line with the government's road map and boosts consumer and business confidence. Most consumers look well-placed to play a key role in the recovery given the recent high savings ratios, although much will depend on how much unemployment ultimately rises.
“Given the resilience of the labour market so far and the extension of the furlough scheme to September, it now looks like the rise in unemployment will be far less than had been predicted. Indeed, the EY ITEM Club suspects that the peak in the unemployment rate will now be limited to 6.3%.
“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; this should be supported by the tax incentives to invest in the Budget. Meanwhile, improving global growth should be supportive to UK exports.
“The EY ITEM Club currently forecasts 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 around mid-2022.
“However, it is very possible that the EY ITEM Club will revise up its 2021 growth projection of 5.0% due to less-than-expected contraction in the first quarter.”