Snapshot

Record UK GDP growth soured by loss in momentum

The UK economy grew by a record breaking 15.5% over the third quarter, leaving the level of activity 7.2% below the pre-Coronavirus level.

The latest growth figure was a little below consensus expectations, as figures for September showed a further decline in the monthly growth rate – 1.1% compared to 1.5% expected, and 2.1% growth in August. This increases the likelihood that the economy may contract in the fourth quarter, as most of the UK has returned to some form of lockdown over the month of November.

Within the quarterly figures, domestic demand was the main driver, adding 17.6 percentage points, but this was partially offset by net trade, which subtracted 2.1 percentage points.

Household consumption grew by 18.3%, but remains 12.4% below the level at the end of 2019. Similarly, investment grew by 15.1%, of which business investment grew by 8.8% - this highlights the degree of difficulty firms are operating with.

Government consumption also rose sharply – up 7.8% after a 14.6% contraction in the previous quarter. Finally, imports outpaced exports, rising 13.2%, compared to just 5.1% growth in exports.

As the economy emerged from lockdowns in the third quarter, businesses were able to restart production and the supply of goods, and to a lesser extent services. Inventories had been depleted in the previous quarter, and so over-production was required to restore normal levels of stocks. This helped boost growth by 1.7 percentage points in the latest figures, but should not be expected to continue.

Most of the positive news in this release was already known thanks to the monthly GDP releases. The disappointing aspect was the loss in momentum in September.

While the government’s “Eat Out to Help Out” discount scheme was a success in boosting activity growth in the food and accommodation sector in August (up 68.4%), the sector saw a contraction in September of 8.2%. The overall services sectors saw activity rise by 1.1%, compared to 2.3% in August, while manufacturing output was almost flat (+0.1%) compared to 0.9% growth in the previous month, and contrary to the strong signals from private business surveys.

Looking ahead, we agree with the Bank of England’s assessment that the economy is very likely to have contracted in the final quarter of the year due to the partial lockdown of most of the country over November.

While we welcome the great news of the success achieved so far in the production and testing of vaccines, it may be some time before sufficient immunisation can be achieved.

It appears this is unlikely to occur before the spring. As temperatures continue to fall in winter, this and the behaviour of people to congregate indoors in poorly ventilated venues will help the virus spread.

We expect current restrictions to bring down the daily number of confirmed cases. However, there is a strong possibility that a return to partial lockdowns may be required again in the New Year, which would delay the economic recovery.