Snapshot

UK avoids recession thanks to Brexit stockpiling


The UK economy grew by 1.2% in the month of December compared to a 2.3% contraction in November and consensus estimates of 1%. This is despite Covid restrictions being intensified towards the end of the month. It means that for the fourth quarter as a whole, the economy grew by 1% - greatly reducing the likelihood of a technical recession (two consecutive quarters of negative growth).

December saw a good rebound in services, as activity rose 1.7% compared to a 3.1% contraction in November. Industrial production output was also up, growing by 0.2% after 0.3% in the previous month. Construction on the other hand suffered a slump, contracting by 2.9%, following growth of 1.7%.

The latest figures complete the data for 2020 as a whole, where the economy contracted by 9.9% - the largest annual fall on record. GDP is also 6.1% below its pre-Covid peak from February 2020.

Despite the better-than-expected headline numbers, the expenditure breakdown paints a worrying picture. Government spending rose by 6.4% in the fourth quarter, likely to be related to increased Covid testing and the start of vaccinations. Better news came from the investment side, which grew by 2.1%, with business investment also rising by 1.3%.

Household consumption contracted by 0.2%, which given current restrictions is probably better than could be expected. However, there is a concern over the UK’s external trade performance, and the build-up of inventories which helped it avoid a contraction overall. Real UK exports grew by just 0.1% in the fourth quarter, compared to 8.9% growth in imports. This meant that net trade reduced GDP by 2.5 percentage points.

As post-Brexit trade negotiations were coming to an end last year, companies were encouraged to prepare for the worst and stockpile once again. This appears to have inflated the imports figures, but exports remained weak. Growth in inventories, which include alignment adjustments, was the single biggest growth component over the quarter, contributing 1.7 percentage points.

This is a concern as it is very likely to reverse in the near future. It suggests that the economy produced more than it consumed, and so in the absence of stronger demand either production will have to be cut back to clear excess inventories, or discounting will occur.

Looking ahead, Covid restrictions are likely to remain in place until mid-March at the earliest, which means that there is a strong likelihood that the economy contracted in the first quarter of 2021, especially as the build-up of inventories is unlikely to be repeated in a similar way. Moreover, the lack of a trade deal with Europe to cover the exports of services means that we could see a sudden drop in those figures in the next set of data.

Thanks to the tremendous progress made in vaccinating the population, we should see activity largely return to normal levels over the second quarter, helping the wider economy - especially services - to recover quickly.

Concerns will remain over mutations and variants of the virus, and so international travel will probably remain restricted for some time while the majority of the world catches up with the UK in vaccinating its population, but 2021 offers plenty of hope of an economy healing.