Pace of UK economic recovery accelerates

The UK economy contracted by 1.5% in the first quarter of 2021 compared to the previous quarter, largely due to restrictions on households and businesses related to the Covid-19 pandemic. However, the contraction in real GDP was smaller than expected, as consensus estimates polled by Reuters were for a 1.7% contraction.

Within the details of the quarterly figures, household consumption fell by 3.9% over the quarter, taking the annual comparison down to -10.4% year-on-year. Total investment fell 2.3%, but within that figure business investment declined by a huge 11.9%. Government spending partially offset these falls at it grew by 2.6%.

Lastly, with Brexit weighing on the ability of firms to import and export, the UK saw exports decline by 7.5%, though imports fell by 13.9%. As a result, there was a positive contribution from net trade of 2.2 percentage points.

The smaller than expected fall in quarterly GDP is thanks to the better performance in the month of March, when the economy grew by 2.1%, against expectations of just 1.3% growth.

The re-opening of schools was the biggest single factor to boost growth, as activity in the sector rose by 8.5% over the month, though education output is still 14.3% below its pre-pandemic peak. The construction sector was the second best performer, rising 5.8% after a 2.2% increase in February.

The worst performing sector in March was households’ domestic and personal services, where activity fell 6.3%, followed by accommodation and food services, down 1.4%.

Looking ahead, the April GDP reading should be very strong, as non-essential retail was allowed to re-open. By the end of May, we should also see more activity in accommodation and food services, along with entertainment.

By the end of June, all restrictions should have been lifted, paving the way for an exceptionally strong rebound over the second quarter, largely thanks to the speedy distribution of vaccines.

Risks of course remain over the share of furloughed staff that will not have a job to go back to. Many retail outlets and restaurants have closed for good, but if demand rebounds sharply, then new businesses may emerge to replace those that have closed.

It may have been a long winter, but the green shoots of recovery are finally emerging.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.