- The national accounts for Q1 confirmed a relatively modest decline in GDP as a result of the most recent lockdown – and a rise in the household saving ratio reaffirmed that consumers have plenty of firepower to fuel a rebound in spending
- Helped by households reverting to more ‘normal savings behaviour’, the EY ITEM Club expects the economy probably grew by 5% or more in Q2. The delay to the full lifting of restrictions and rising infections are risks to the expansion, but it’s looking increasingly likely that GDP will regain pre-crisis levels by the end of 2021
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“Q1’s national accounts highlighted two matters of importance in assessing prospects for the recovery.
“First, the economy emerged from lockdown with a relatively solid base for growth. For sure, GDP fell 1.6% quarter-on-quarter – revised down slightly from the original estimate of a 1.5% decline – but even allowing for the boost to output in Q1 from Government spending on COVID-19 testing and vaccinations, the quarter’s contraction was a far cry from the 19.6% quarter-on-quarter fall in output during the first lockdown in Q2 2020.
“The second point of interest was the significant rise in the household savings ratio to 19.9%, up from 16.1% in Q4 2020. This compared with an average of 8.5% from 2010-19. Higher savings reflected a lockdown-related fall in spending, but incomes remaining flat thanks to private sector adaptation and government support. The elevated savings ratio reaffirms that households are emerging from the crisis with cash to fuel higher spending.
“A boost to consumer spending from households reverting to more ‘normal’ savings behaviour in Q2 will have aided what is likely to have been a 5%+ quarter-on-quarter rise in GDP. The delay to removing remaining restrictions and any effect to confidence from the recent rise in COVID-19 infections present potential risks to this forecast though. But with reports suggesting vaccines look effective at weakening the link between infections and hospitalisations and deaths, the EY ITEM Club currently forecasts that the economy will regain its pre-pandemic size by the end of 2021.”