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Our views 12 March 2021

UK: Lockdown hits, while outlook improves

5 min read

With the return of lockdown, the UK economy shrank in January. What was more surprising was perhaps how little the economy contracted. GDP fell 2.9%M, compared to consensus expectations of 4.9%M.

The fall was also a lot smaller than in April 2020 (18.3%) when the first lockdown hit.Business was disrupted less – construction sites remaining open for example – and both businesses and households (and public services, e.g. education) will have been better able to adjust this time around – more likely to have necessary technology in place for example, and be better able to use it effectively.

Nevertheless, the UK has been a big economic underperformer during the crisis and still has a lot of ground to make up. As of January, the level of GDP was 9.0% below pre-crisis levels. Growth rates should be strong though, as activity is allowed to normalise.

The UK outlook has improved since the turn of the year, however, for several reasons: Sharply lower Covid numbers that – so far – keep the government’s roadmap out of lockdown on track; the UK’s very successful vaccine rollout – likely helping those Covid numbers to fall and making it more likely that lower Covid numbers are here to stay, so that economic activity can properly normalise; and the additional fiscal stimulus from the Chancellor in the March Budget. The external demand outlook has arguably improved too, with another very large dose of US stimulus imminent and more likely on the way later this year.

Brexit effects are starting to show strongly in the goods trade data, where there were huge falls in exports to and imports from the EU in January (-40.7%MoM and -28.8%MoM respectively). Much of that will reflect activity having been pulled forward to Q4 last year to try and avoid border disruptions, but the figures were striking nonetheless. Over the year as a whole, Brexit is still likely to prove a drag on growth, but the effects on GDP will be dominated by Covid and changing social distancing restrictions.

There are still upside risks to the outlook for consumer spending, if excess savings are unwound.

On the downside, putting virus mutation to one side, premature policy tightening remains a concern – though less so for now after the Budget. I still worry that any bounce in business investment will be held back by debt burdens taken on by some companies in the crisis, although the Chancellor’s tax incentives to bring forward investment spending should help over the next couple of years. Mobility data also suggest a pick-up in activity in February, before any ease in lockdown restrictions. If that is followed by a pick-up in Covid numbers, then the ‘roadmap’ out of lockdown may be delayed, delaying economic recovery too.

Overall though, it is hard not to be more optimistic about the UK outlook compared to the turn of the year and my 4.1% GDP forecast for 2021 now looks too pessimistic.

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.