Press release

13 Apr 2021 London, GB

EY ITEM Club comments on February GDP figures

The UK economy came modestly off its January low in February as GDP rose 0.4% month-on-month (m/m), despite the ongoing lockdown. GDP had earlier contracted 2.2% m/m in January (revised from a previously reported fall of 2.9% m/m), which had been substantially less the consensus expectation of a decline around 5% m/m.

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Related topics Growth COVID-19
  • The UK economy came modestly off its January low in February as GDP rose 0.4% month-on-month (m/m), despite the ongoing lockdown. GDP had earlier contracted 2.2% m/m in January (revised from a previously reported fall of 2.9% m/m), which had been substantially less the consensus expectation of a decline around 5% m/m.
  • GDP rising modestly in February despite restrictions after a surprisingly small contraction in January shows the UK economy is now being less affected by lockdowns than was originally the case. Lessons have been learned in keeping economic activity going during lockdowns.
  • There was expansion across all output sectors in February: services output rose a modest 0.2% m/m, while there was faster expansion in industrial production (1.0% m/m) and construction output (up 1.6% m/m).
  • On the expenditure side of the economy, it appears consumers were a little more willing to spend: retail sales rose 2.1% m/m in February after a fall of 8.2% m/m in January.
  • Following February’s modest improvement, the economy seems to have taken significant steps forward during March as increasingly confident businesses prepared for the opening up of the economy on 12 April and consumers looked to start releasing pent up demand. March saw an improved set of purchasing managers’ surveys for the services, manufacturing and construction sectors, while consumer confidence rose substantially.
  • The Government’s road map out of lockdown does seem to have lifted business and consumer confidence. The economic boost has likely been reinforced by the further near-term supportive measures contained in the Budget.
  • It still looks more likely than not that the economy contracted in Q1 2021 as a result of lockdown measures, but the EY ITEM Club now suspects the economy contracted by around 1% quarter-on-quarter (q/q) rather than the 3-4% q/q contraction originally anticipated.
  • With Q1 likely seeing a markedly slower contraction than had been anticipated, and with the economy looking to be on the front foot going into Q2, the EY ITEM Club will be substantially raising its current 2021 GDP growth forecast of 5.0% in its Spring Forecast – released on 26 April. The economy is expected to benefit progressively from Q2 as restrictions on activity are eased, supported by the roll-out of COVID-19 vaccines.
  • Consumers look well-placed to play a leading role in the UK recovery given the recent high savings ratios, especially as it now looks likely that unemployment will rise much less than had been expected, helped by the extension of the furlough scheme. 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 and their own prospects; this should be supported by the tax incentive to invest in the Budget.  

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

“The economy came modestly off its January lows in February, despite the ongoing lockdown. GDP rose 0.4% month-on-month after a fall of 2.2% month-on-month in January. January’s decline in GDP was revised from a previously reported contraction of 2.9% and was substantially less than the decline around 5% month-on-month that had originally been expected.

“The latest data show the UK economy is being less affected by lockdown measures now than was originally the case: lessons have been learned and experienced gained in keeping activity going. Companies and employees have got used to home working and, significantly, many workplaces, offices, sites and plants have been adjusted to meet COVID-19 social distancing requirements so that employees can continue to work on site.

“The year-on-year decline in GDP narrowed to 7.8% in February after widening to 8.5% in January from 6.3% in December. Meanwhile, GDP was down 1.6% in the three months to February compared to the three months to November.”

February GDP rise result of expansion across all output sectors

Howard Archer continues: “All output sectors contributed to February’s month-on-month increase in GDP.

“Services sector output rose a modest 0.2% month-on-month in February after a 2.5% decline in January, as it continued to be the sector most affected by restrictions. This included the closure of non-essential retailers and limited activity for many consumer-facing businesses, particularly those in hospitality, leisure or travel. The ONS reported that that was a slight pick-up in retail and wholesale trade in February. Health output fell 2.7% m/m in February after a significant increase in January when it was lifted by COVID-19 testing and tracing and vaccine schemes across the UK.

“Manufacturing output rebounded 1.3% month-on-month in February after dipping 2.3% in January, with output rising in seven out of 13 sub-sectors. The strongest performance occurred in the transport equipment sector – which grew by 5.4% m/m – and manufacturing of computer, electronic and optical products – which grew by 9.0% m/m. Manufacturing activity was affected significantly 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. These supply chain issues seemingly eased to some degree in February, although they did not disappear.

“Overall, industrial production rose 1.0% month-on-month in February after falling 1.8% in January. February’s 1.3% rise in manufacturing output was partly offset by mining and quarrying output falling 2.1% month-on-month.

“Construction output grew 1.6% month-on-month in February after being flat in January. Both new and repair work expanded in February.

“On the expenditure side of the economy, it appears that consumers spent modestly more in February after being particularly cautious in January. Retail sales volumes rose 2.1% month-on-month in February after a decline of 8.2% in January. Consumers’ scope to spend in February remained limited by the closure of non-essential retailers and constraints on hospitality, leisure and consumer services.”

Outlook

Howard Archer continues: “Following the modest improvement in February, the economy seems to have taken significant steps forward during March as increasingly confident businesses prepared for the significant opening up of the economy on 12 April and consumers looked to start releasing pent up demand. The Government’s road map out of lockdown does seem to have lifted both business and consumer confidence. The boost to the economy has likely been reinforced by the additional near-term supportive measures contained in the 3 March Budget.

“March saw a significantly improved set of purchasing managers’ surveys for the services, manufacturing and construction sectors, while consumer confidence rose appreciably, according to the GfK survey. A number of surveys also indicated a notable rise in business confidence in March and early-April.

“It still looks more likely than not that the economy contracted in the first quarter as a result of lockdown, but the decline in GDP was probably substantially less than had originally been expected. The EY ITEM Club now suspects that the economy contracted by around 1% quarter-on-quarter in the first quarter, compared to the 3-4% contraction that had originally been anticipated.

“With the first quarter likely seeing a markedly slower contraction than expected, and with the economy looking to be on the front foot going into the second quarter, the EY ITEM Club will be substantially raising its current 2021 GDP growth forecast of 5.0% in the upcoming Spring Forecast. The economy is expected to benefit progressively from the second quarter as restrictions on activity are eased, supported by the rapid roll-out of COVID-19 vaccines.

“Consumers look well-placed to play a leading role in the UK recovery given the recent high savings ratios, especially as the labour market has been resilient so far. It now looks likely that unemployment will rise much less than had been forecast, partly due to the extension of the furlough scheme to the end of September.

“Additionally, after an extended period of relative weakness, business investment is expected to gain momentum over the course of the year as companies grow more confident in the economy and their own prospects. This should be supported by the tax incentive to invest that were announced in the Budget.”