UK economy rebounds as Covid restrictions are eased
UK economy rebounds as Covid restrictions are eased
The UK economy grew by 2.3% in the month of April compared to March as the easing of restrictions helped spur a resurgence in activity, especially in the services sectors. The early estimate of growth was slightly better than consensus expectations of 2.2%. It also means that on a rolling three-month basis, economic growth is back in positive territory (1.5%) for the first time since the end of last year.
Within sectors, overall production sectors saw a fall in output of 1.3%, dragged down mostly by mining and quarrying, which fell sharply (-15%). This was due to planned temporary closures for maintenance of oil field production and should reverse next month.
Manufacturing also fell (-0.3%), which may have partly been caused by the closure of the Suez Canal, which caused difficulties in exporting and importing goods. The biggest drag came from the basic pharmaceutical products and preparations sector, where output fell by 16% over the month, and the manufacture of transport equipment (-2.8%).
Services were the main drivers of the rebound as restrictions were reduced for many public facing services. The biggest beneficiary was the accommodation and food services sector, where activity rose by 44% in April. Though this is an astonishing figure for a single month, it’s worth noting that activity in the sector is still 40.5% lower than in February 2020. Further significant gains are due to follow. Wholesale and retail trade also saw strong gains (+8.9%) along with education services, as schools enjoyed their first full month back this year (+11.1%).
Finally, construction sector output moderated (-2%) after a strong rise in March (+5.8%). Construction output is now 2.3% above its pre-pandemic levels, however, we continue to forecast robust gains this year. We expect this to occur as the evidence from private business surveys suggests that investment is set to accelerate into the second half of the year.
Overall, the latest growth figures are encouraging and we anticipate similar gains for the month of May. This puts the economy on course for over 5% growth for the second quarter as a whole. Private business surveys have remained very strong, but are warning that shortages of materials and parts are forcing manufacturers to raise their prices.
The Office for National Statistics also reports that the share of those employed and partially furloughed, or on furlough leave, fell 4.5 percentage points to 12.6% - its lowest level since December 2020. The share working at their normal place of work rose 5.7 percentage points to 54.7%, again, back to December 2020 levels.
With unemployment falling to 4.8% in the three months to March, it appears that momentum is building in the labour market, which should help boost consumer confidence and spending. The challenge comes when the government’s furlough scheme is unwound through the summer, but we suspect strong demand should help most workers return to usual employment.
For the Bank of England (BoE), its biggest challenge will be managing expectations of rate rises as growth and the labour market recover. Inflation is trending up over the coming month, largely due to the recovery in energy prices, but also the removal of the VAT discounts from last year.
However, our forecast has CPI inflation falling back below target next year. While the BoE may end its quantitative easing programme this year, our forecast suggests it should keep interest rates on hold for some time, potentially until 2023.
- Which city tops the Schroders European Sustainable Cities index?
- OPEC wrangling emphasises EM energy exporters’ predicament
- Podcast: The plastic problem facing investors
- ‘Boom and bust’ for the US consumer?
- Workers of the world unite! How the post-pandemic recovery is increasing the bargaining power of labour
- Savers predict double-digit investment returns: is that a danger sign?
The views and opinions contained herein are those of the Authors, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested.
Schroders has expressed its own views in this document and these may change (to be used if the 1st statement above is not being used).
Issued by Schroder Investment Management (Europe) S.A., 5, rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799. For your security, communications may be taped or monitored
The forecasts stated in the document are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today’s date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change.