UK GDP shrank by 1.5% in the first quarter, according to the Office for National Statistics, but there are signs of the economy “powering back into a strong recovery”.
While GDP grew by 1.3% in Q4 2020, a fresh lockdown saw GDP decline sharply by 2.5% in January, before bouncing back with 2.1% growth in March as the easing of restrictions grew closer.
The quarterly figure was 8.7% below its level before the pandemic for Q4 2019.
The weakness in GDP in the first quarter was largely led by a 2% decrease in services output, including an 18.2% drop in accommodation and food services, as well as a 5.9% decline in the wholesale and retail trade sector.
However, the 1.5% contraction was more positive than the predicted 4% drop as March saw strong growth in the construction and manufacturing sector which saw 5.8% and 2.1% growth, respectively, while the service sector grew 1.9%.
‘Powering back’
Gam Investments investment director Charles Hepworth (pictured) said the figures give a strong indication of the UK economy “powering back into a strong recovery and getting the justified reward for fast vaccine distribution”.
AJ Bell financial analyst Danni Hewson said despite continued lockdowns for many sectors, these signs of recovery have “particular significance because it shows how the economy can function if future lockdowns arise”.
Invesco global head of asset allocation Paul Jackson said he expects a further gradual release of pent-up demand, indicated by a household savings ratio of 16.1% at the end of 2020, compared to a 2019 average of 6.5%. This, he added, will “generate better than average growth during the second half of the year”.
Bank of England is optimistic on GDP
The Bank of England announced last week that it expects the UK to achieve 7.25% GDP growth this year.
Kingswood chief investment officer Rupert Thompson said the latest numbers will “bolster hopes” that the UK can reach such growth, which will make it the fastest growth in 70 years. He added that alongside the jump in business confidence seen in April, these figures suggest the bank’s growth forecast “might even be on the conservative side”.
Hepworth said a faster recovery would changed the dynamic of central bank rate decisions, adding that “gilt yields are seeing a drift higher this morning as the prospect of negative rates is further removed from their outlook”.
However, Jackson said that today’s figures are unlikely to change the view of market participants as, after strong gains over the last 12 months in anticipation of the economic recovery, the FTSE 100 and other major indices have lost ground over recent days.
The FTSE closed down 2.5% yesterday but was up 0.24% around midday.
Non-EU imports outpace those from EU countries
The ONS also released March’s trade statistics which showed that Q1 was the first quarter since records began in January 1997 that imports of goods from non-EU countries were higher than from EU countries.
Imports of goods from non-EU countries, excluding precious metals, increased by £1.5bn in March 2021, driven by clothing imports as March’s retail sales index showed an 18.3% increase in sales of clothing and footwear, while exports increased by £1.3bn mainly driven by exports of cars.
However, Hewson said: “Europe’s been waging its own battle with coronavirus so disruption to supply chains is unsurprising. What happens over the next six months will be more illustrative and bears watching.”
