- Q4 2020’s upwardly revised 1.3% quarter-on-quarter (q/q) GDP growth was a resilient performance given November’s lockdown and other COVID-19 restrictions. Expectations had been for a lockdown-prompted contraction
- The UK economy contracted 9.8% in 2020 and Q4 2020 GDP was 7.3% below the Q4 2019 peak
- Q4 saw growth in manufacturing and construction output, with many plants and sites now compatible with social distancing requirements. Services output achieved growth of 1.0% quarter-on-quarter, despite many hospitality and leisure activities being unavailable and non-essential retailers closed for much of the quarter. This was offset by sharp rises in health and education output
- On the expenditure side of the economy, Q4 growth was largely due to increased investment, government spending, and a building up of inventories. However, consumer spending fell markedly while net trade was negative as imports rose much more than imports
- A rise in the household savings ratio to 16.1% in Q4 2020 and a level of 16.3% over 2020 suggests consumers overall are in a good position to spend as restrictions ease through Q2 2021. Lower than previously expected peak unemployment levels also look likely to support consumer spending. Additionally, 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, supported by the tax incentive to invest in the budget. Consequently, a decent recovery is expected to develop from Q2
- The EY ITEM Club now suspects the economy contracted by just over 1% q/q in Q1 2021, compared to the 3-4% q/q GDP decline originally anticipated. This follows a less-than-forecast 2.9% month-on-month contraction in January while there is evidence that activity picked up in February and March. The EY ITEM Club is therefore likely to significantly raise its current 2021 GDP growth forecast of 5.0%
- The current account deficit widened to £26.3bn (4.8% of GDP) in Q4 2020 from £14.3bn (2.6% of GDP) in Q3. This was primarily due to a widening of the trade deficit
- A large current account deficit has been seen as a potential source of vulnerability for the UK economy – particularly if there were to be a loss of investor confidence for any reason. Past large deficits led former Bank of England Governor Mark Carney to comment that “relying on the kindness of strangers is not optimal” amid global economic uncertainty.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The Office for National Statistics confirmed that the economy put in a resilient performance in 2020’s fourth quarter, despite a lockdown in November and other restrictions on activity. Indeed, GDP growth in Q4 2020 was revised up to 1.3% quarter-on-quarter from an initial estimate of a 1.0% expansion.
"At one time there had been strong belief that the fourth quarter would see a renewed economic contraction. However, it is evident that lessons have been learned in keeping activity going amid COVID-19 restrictions.
“Despite fourth quarter growth, the economy contracted by 9.8% (slightly less than the previous estimate of a 9.9% decline) over the course of 2020 thanks to the substantial impact of COVID-19 restrictions earlier in the year. GDP was down 7.3% year-on-year in the fourth quarter.
“Looking back, the impact of the first national lockdown meant there were contractions of 2.8% quarter-on-quarter in the first quarter and 19.5% quarter-on-quarter in the second. The economy achieved 16.9% growth in the third quarter following the substantial easing of restrictions."
Manufacturing, construction and services all contributed to Q4 growth
Howard Archer continues: “Fourth quarter growth on the output side of the economy was led by decent performances in the manufacturing and construction sectors. These saw respective quarter-on-quarter expansions of 3.3% and 2.7%. Both sectors benefited from adjustments being made to many factories and sites to make them consistent with social distancing requirements. There was also a clear 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.
"The services sector was impacted by restrictions but still achieved output growth of 1.0% quarter-on-quarter. Large parts of the hospitality and leisure sectors and non-essential retail stores were closed for much of the quarter. However, services output was lifted by the health sector growing 11.8%, mainly because of the coronavirus testing and tracing schemes across the UK. Meanwhile, education output grew 9.2%, reflecting higher levels of school attendance.”
Consumer spending fell appreciably in Q4; business investment saw pick up
Howard Archer continues: “On the expenditure side of the economy, growth in the fourth quarter was largely due to increased investment, government spending, and a building up of inventories. However, consumer spending fell markedly while net trade was negative as imports rose much more than imports.
“Consumer spending contracted 1.7% quarter-on-quarter – as the ability to spend was limited by the closure of hospitality, leisure and non-essential retail businesses during much of the quarter. This meant that the household savings ratio rose to an elevated level of 16.1% in Q4, up from 14.3% in Q3 – amounting to 16.3% over 2020, which has increased consumers’ future purchasing power.
“Overall investment rose 4.4% quarter-on-quarter in the fourth quarter. Business investment continued to recover after a sharp contraction over the first half of the year as it rose 5.9% quarter-on-quarter, but it was still 7.4% below its level in the same period in 2019. The ONS notably reported that investment tended to be limited to essential equipment or maintenance, rather than discretionary or strategic projects, because of concerns about the strength of the recovery, uncertainty about the outlook, and cash positions. Looking ahead, business investment is expected to gain momentum over the course of the year as companies grow more confident in the economy, supported by the tax incentives to invest which were announced in the Budget.
“Meanwhile, government investment rose 4.5% quarter-on-quarter in the fourth quarter. Government spending rose 6.7%, led by increases in expenditure on health, including on testing and tracing.
“There was a positive impact from the inventories component of the economy in the fourth quarter. According to the ONS, “the revised unaligned inventories data now show an increase of £1.5 billion in stocks being held by UK companies in Quarter 4 2020, mainly finished manufacturing goods. 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 rose 6.1% quarter-on-quarter while imports grew 11.0%. Imports may well have been lifted by some stockpiling behaviour ahead of the ending of the UK-EU transition arrangement.”