Brexit and lockdown hit UK economy, but sharp rebound awaits

The UK economy got off to a poor start for the year, contracting by 2.9% in January compared to 1.2% growth in December 2020.

On a rolling quarterly basis, GDP has fallen from 1% growth to -1.7% over the same period. Indeed, on a year-on-year basis, the economy has contracted by 9.2% - highlighting the challenges that remain.

Though a fall in GDP is never welcome news, the early estimate is better than consensus estimates of -4.9%, but largely in line with the Schroders forecast.

Within the details, manufacturing output underperformed expectations by contracting by 2.3%, while the dominant service sector contracted by 3.5%.

Within services, the accommodation and food sector had a torrid month, shrinking by 27.9%. The sector’s activity is now 68% lower than its pre-pandemic peak.

The next worst performer on the month was education services, down 16.2%; understandable, considering schools remained closed through the month.

In a separate release today, the extent of the disruption to trade wrought by Brexit was brought to light. Exports of goods excluding non-monetary gold fell by £5.3bn (19.3%) in January, largely caused by a £5.6bn (40.7%) fall in exports to the European Union. Imports were even more disrupted, falling by £8.9bn (21.6%), with imports from the EU down £6.6bn (28.8).

While the trade deficit on this measure with Europe has fallen to just over £8bn, this is higher than the deficit from as recently as October 2020 (£-7.6bn).

As highlighted in our previous UK GDP note it appears that UK companies were building up their inventories of goods ahead of the end of the Brexit transition period. This helped the UK avoid a contraction at the end of last year, and so the fall in the trade deficit should be seen as an unwind of this phenomenon, rather than a genuine improvement from trade policy.

Returning to growth, the UK’s lockdown situation was unchanged February, so we do not foresee much of a rebound over the month. However,  with schools now reopen, March appears more promising.

For the first quarter overall, we are sticking to our forecast of a 2.4% contraction, before the start of a recovery in the second quarter as businesses are expected to re-open.