- The UK economy got off to a healthy start to Q2 as GDP grew 2.3% month-on-month (m/m) in April. This was the best monthly growth performance since July 2020.
- The economy was helped in April by the easing of restrictions on the 12th of the month, including the re-opening of non-essential retailers. It is also evident that increasingly confident consumers and businesses had become more active during March when GDP grew 2.1% m/m.
- Growth in April was due to services output growing 3.4% month-on-month. However, there was contraction in industrial production (1.3%), and construction output (down 2.0%).
- On the expenditure side of the economy, it appears consumers were more willing and able to spend in April following the re-opening of non-essential retailers: retail sales volumes increased 9.2% m/m over the month.
- The economy appears to have built on April’s strong performance in May, with a range of recent surveys strongly positive. Easing restrictions in April and May have 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 EY ITEM Club expects Q2 GDP growth around 5% quarter-on-quarter and the economy to grow 6.8% over 2021. Currently, the EY ITEM Club says there look to be mounting upside risks to this forecast.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The economy started the second quarter on the front foot, expanding 2.3% month-on-month in April following a contraction of 1.5% quarter-on-quarter in the first quarter. April saw the strongest monthly growth performance for the UK economy since last July as it clearly benefited from the easing of restrictions on 12 April. This notably included the re-opening of non-essential retailers.
“However, the economy had already shown signs of improvement as the first quarter progressed, despite lockdown restrictions persisting, with businesses and consumers becoming more confident in the outlook as the COVID-19 vaccines were rolled out.
“It also appears that consumer and business confidence was helped from early March by the Government setting a road map out of lockdown and by the additional near-term supportive measures for jobs and the economy included in the 3 March Budget.
“Following a contraction of 2.5% month-on-month in January, the economy grew 0.7% in February and 2.1% in March. This meant that GDP was up 1.5% on a three-month/three-month basis in April compared to the 1.5% decline in March. It also meant that the economy in April was only 3.7% smaller than in February 2020, just before the pandemic started to have an impact on the economy.
“Furthermore, GDP was up 27.6% year-on-year in April compared to the small increase of 1.4% in March and the 7.8% year-on-year decline in February. This is a consequence of April 2020 being the worst month for the UK economy on record as GDP contracted 18.7% month-on-month in the wake of the first lockdown introduced on 23 March.
“April's month-on-month GDP growth was due to services output growing 3.4% month-on-month. The ONS reported this was due to ‘consumer-facing services re-opening in line with the easing of coronavirus restrictions and more pupils returning to onsite lessons.’
“However, construction output fell back 2.0% month-on-month in April after strong growth in March. Meanwhile, industrial output fell 1.3% month-on-month as there was a significant fall of 15.0% month-on-month in the oil and production sector due to maintenance work. Manufacturing output edged down 0.3% month-on-month.
“On the expenditure side of the economy, it looks like increasingly confident consumers were more prepared to spend: April retail sales volumes rose 9.2% month-on-month.”
Economy looks to have built on April's progress in May
Howard Archer continues: “The economy looks to have performed well in May as it fully benefited from April’s easing of restrictions, while there was a further easing on 17 May which helped the hospitality sector.
"In particular, May’s set of purchasing manager's surveys for the services, manufacturing and construction sectors were strong. Survey evidence from the British Retail Consortium and Barclaycard pointed to robust consumer spending too. This was reinforced by markedly stronger consumer confidence.”
Economic outlook positive
Howard Archer adds: “The EY ITEM Club expects the economy to grow by around 5% quarter-on-quarter in the second quarter, and by 6.8% over 2021. However, there currently look to be mounting upside risks to the forecast.
“Following a first quarter GDP contraction, the economy looks well on course for a very healthy rebound in the second quarter given reduced restrictions and the ongoing successful roll-out of COVID-19 vaccines.
“Consumers look well-placed to play a leading role in the UK recovery thanks to the recent high savings ratios, especially as it now looks likely that unemployment will have a much lower peak than had been expected. The jobs situation 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.”