UK monthly GDP has fallen by 2.6% in November after large swathes of the country returned to lockdown. A spike up in confirmed cases and deaths from Covid-19 left the government little option but to restrain activity, which has resulted in the first fall in monthly output since April.
However, unlike the first lockdown in spring, restrictions varied by regions, and in most instances, many sectors were allowed to continue to operate. For example, manufacturing output rose 0.7% in November, while construction activity was also up 1.9%.
The services sector was the hardest hit as activity fell 3.4%. Unsurprisingly, activity in accommodation and food services collapsed – down 44%. Arts, entertainment and recreation saw a 14% fall on the month, while wholesale, retail and repairs activity fell 5.6%.
Overall, the UK economy is now 8.5% below the levels seen in February 2020. GDP is down 8.9% in the 12 months to November.
Looking ahead, the next monthly estimate for December is also likely to be negative, albeit less so than in November. More regions saw restrictions increased just before Christmas, which ensures that the fourth quarter as a whole will also be negative. Moreover, as pretty much the whole of the UK is now in lockdown for an unforeseen length of time, GDP may also contract in the first quarter of 2021, leading to a technical double-dip recession.
However, with vaccinations progressing at a rapid pace, we may see the recovery resume in the second quarter, before gathering momentum in the second half of the year, by which time, most domestic restrictions should have been removed.
Given the near-term outlook, pressure is rising on policy makers to add further stimulus to support growth. The Bank of England only recently increased the size of its quantitative easing programme (i.e. asset purchases), but some are calling for interest rates to be lowered to below zero. We do not expect interest rates to be lowered any further due to the limited gains from the policy change, and the unintended negative side effects.
However, as other European countries have done, the chancellor may set out a comprehensive fiscal recovery package later in the year, which will likely focus on upgrading infrastructure and green initiatives.