- While the UK economy contracted in Q1, the 1.5% quarter-on-quarter (q/q) decline marked a resilient performance amid lockdown measures. Expectations at the start of the quarter were for a contraction of up to 4-5% q/q
- The economy improved progressively through Q1 despite lockdown continuing. Following contraction of 2.5% month-on-month (m/m) in January, GDP grew 0.7% m/m in February and 2.1% in March. Lessons have clearly been learned in keeping economic activity going during lockdowns
- On the expenditure side of the economy, it appears consumers were more willing to spend in March: retail sales volumes rose 5.4% m/m last month. Q1’s overall contraction on the expenditure side was largely due to a fall in consumer spending amid reduced opportunities to spend; business investment also declined. Exports fell significantly, particularly due to issues at the start of the quarter when the UK’s transition agreement with the EU ended – although the trade balance was positive as imports fell further. Government consumption also made a positive contribution to growth
- The economy appears to have started Q2 on the front foot, with a range of April surveys strongly positive. The easing of restrictions on 12 April has boosted an economy that was already starting to improve as the road map out of lockdown lifted business and consumer confidence. This boost has seemingly been reinforced by the near-term supportive measures contained in March’s Budget. The further easing of restrictions on 17 May should also lift activity
- With Q1 seeing a smaller contraction than anticipated, and with the economy on the front foot early on in Q2, the EY ITEM Club has raised its 2021 GDP growth forecast to 6.8%. The economy is expected to benefit progressively from Q2 as restrictions on activity are eased, supported by the roll-out of COVID-19 vaccines. Growth is seen slowing in 2022 to a still-elevated 5.0%
- Consumers look well-placed to play a leading role in the UK recovery given recent high savings ratios, and especially as it looks likely that unemployment will have a much lower peak than expected. The unemployment outlook is helped by the recent resilience of the labour market, the development of a robust recovery, and the extension of the furlough scheme to September. Additionally, 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 impact of the latest lockdown meant the first quarter saw the UK economy’s first contraction since the second quarter of 2020. However, the quarter-on-quarter 1.5% decline was less than half the contraction of 4-5% that had originally been considered likely. It was also much smaller than the 19.5% quarter-on-quarter decline seen in the second quarter of 2020 when the first lockdown was introduced.
“The limited first quarter GDP contraction highlights that experience has been gained in keeping activity going amid COVID-19 restrictions.
“Positively, the economy improved through the first quarter, despite lockdown restrictions remaining in place. Following a contraction of 2.5% month-on-month in January, the economy grew 0.7% in February and 2.1% in March. The year-on-year decline in GDP narrowed to 6.1 % in March from 7.8% in February and 8.5% in January. Overall, GDP in the first quarter of 2021 was down 6.1% year-on-year while it was 8.7% below its peak level in the fourth quarter of 2019.
“March's month-on-month GDP growth of 2.1% was the result of expansion across all output sectors. Services output was healthy, expanding 1.9%, helped by strong activity in the health sector. Industrial output expanded 1.8% month-on-month as manufacturing output grew 2.1%. Construction output grew 5.8%.
“On the expenditure side of the economy, it looks like increasingly confident consumers were more prepared to spend in March: retail sales volumes rose 5.4% month-on-month.”
Services and manufacturing contributed to Q1 contraction; construction grew
Howard Archer continues: “First quarter contraction on the output side of the economy was the consequence of declines in the services and manufacturing sectors; construction output expanded 2.6% quarter-on-quarter.
“Both the manufacturing and construction sectors have benefitted from adjustments being made to many factories and sites to make them consistent with social distancing requirements. However, it is evident that manufacturing activity was affected early on in the first quarter in particular 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.
“Consequently, manufacturing output fell 0.7% quarter-on-quarter in the first quarter, contributing to a 0.4% quarter-on-quarter decline in industrial production. The manufacture of transport equipment was particularly weak.
"The services sector was most affected by restrictions in the first quarter, and contraction in output amounted to 2.0% quarter-on-quarter. Education saw the largest fall while there also appreciable declines in accommodation and food services, and the wholesale and retail sector. Large parts of the hospitality and leisure sectors were closed for much of the quarter, as were non-essential retailers. However, services output was lifted by the health sector growing 1.8%, mainly because of the COVID-19 test and trace schemes across the UK.”
Consumer spending fell in Q1; business investment also contracted
Howard Archer continues: “On the expenditure side of the economy, contraction in the first quarter was largely due to declines in consumer spending and business investment. Exports also fell significantly, but the negative impact on net trade was limited as imports fell too.
“Consumer spending contracted 3.9% quarter-on-quarter as the ability to spend was limited by the closure of hospitality, leisure and non-essential retail businesses through the quarter. The weakness in consumer spending was particularly marked early on in the quarter and it will likely have boosted the household savings ratio further.
“Overall investment fell 2.3% quarter-on-quarter in the fourth quarter, with business investment dipping 11.9% quarter-on-quarter after showing a limited recovery in the second half of 2020.
“Meanwhile, government investment rose 19.7% quarter-on-quarter in the first quarter. Government spending rose 2.6%, led by increases in expenditure on health, including on testing and tracing.”
“There was a modest negative impact from the inventories component of the economy in the first quarter.
“Net trade made a significant positive contribution to first quarter GDP as exports of goods and services fell 11.6% quarter-on-quarter, while imports declined 15.6%. Both exports and imports were affected by transport delays – especially at ports – early on in the quarter following the ending of the UK-EU transition arrangement on 31 December.”
Howard Archer observes: “The EY ITEM Club has recently substantially raised its 2021 GDP growth forecast to 6.8%, up from 5.0%. The economy is expected to benefit progressively from the second quarter as restrictions on activity are eased, supported by the roll-out of COVID-19 vaccines. Growth is seen slowing in 2022 but remaining elevated at 5.0%.
“Following the limited contraction in the first quarter, the economy seems to have taken significant steps forward early in the second quarter, helped by the significant easing of restrictions on 12 April. This is likely to be reinforced by the further easing of restrictions on 17 May. The road map out of lockdown does seem to have lifted both business and consumer confidence, and this boost has likely been reinforced by the additional near-term supportive measures contained in the 3 March Budget.
“Survey evidence for April has already been strongly positive, especially from the purchasing managers across the services, manufacturing and construction sectors. Additionally, consumer spending appears robust following the re-opening of non-essential retailers.
“Consumers look well-placed to play a leading role in the UK recovery given the recent high savings ratios, and especially as it now looks likely that unemployment will have a much lower peak than had been expected. The unemployment outlook has been helped by the recent resilience of the labour market, the development of a robust recovery, and the extension of the furlough scheme to September.
“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, and there is evidence in the latest surveys that business investment is picking up.”