Data continues to point to a strong post-lockdown recovery in the UK economy, and a more front-loaded recovery so far than I’d expected. The UK’s vaccine rollout remains a key reason for the strength so far, enabling the government to stick to its reopening ‘roadmap’ and for individuals to feel more confident about social interaction.
UK GDP grew strongly and roughly in line with consensus expectations in April as social distancing restrictions loosened, up 2.3%M after 2.1%M (consensus: 2.4%M). The gains were driven by services (up 3.4%M) as the economy reopened (non-essential retail, holiday lets, outdoor dining etc.) and as more children returned to school after lockdown. Less reassuringly, manufacturing and construction output fell.
It’s not often you get to say that UK GDP grew 27.6%Y… but it did in April (reflecting, of course, the strict lockdown that the economy faced last April). There is still plenty of ground to make up though. Compared to February 2020 (i.e. pre-pandemic) levels of GDP, the economy is still running 3.7% below.
Further robust gains in GDP are likely, reflecting the further reopening of the economy. Even if May and June saw flat output, UK GDP would be on track to grow 4%Q in Q2. May and June are very unlikely to see zero or negative growth though: the economy has reopened further and business survey indicators have been strong; High frequency data is consistent with a further pick-up in consumer-related activity. In general, the economy looks set for a more front-loaded recovery this year than I’d pencilled in, with Q2 a bit stronger and Q3 likely a bit weaker than anticipated.
UK recovery prospects have generally improved with the continued very successful vaccination drive. However, the recent rapid rise in Covid cases is a concern. It wouldn’t be much of a surprise at this point if they held back the next phase of reopening in some form, as well as persuaded many households to be more cautious in their social – and therefore economic – interactions. Trade tensions between the EU and UK are also something of a concern.
Looking beyond the next quarter, fiscal policy is set to become much less supportive later this year. The furlough scheme, for example, is set to wind-up in September. Despite a strong recovery underway and plenty of theoretical fuel for the recovery in the shape of higher aggregate household savings, the change in fiscal stance is likely to help mean that the economy returns to more ‘normal’ growth rates into and over 2022.
For more on the UK outlook, see 'Returning to Recovery' here
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are the author’s own and do not constitute investment advice.