GAM: Outlook for the UK economy looks precarious.
The UK faces a “precarious” economic outlook as the pandemic hits confidence and Brexit trade deal talks continue, warns Charles Hepworth, investment director at GAM Investments:
He says October’s slowdown shows the impact of lockdown measures – which could see the UK economy shrink again this quarter:
As lockdown restrictions resurfaced across much of the UK in the fourth quarter, the effects have started to show already in October’s monthly GDP print, which posted a 0.4% advance against the 1.1% advance we saw in September. The general expectation is for a Q4 contraction in GDP as a whole as the economy continues to deflate from the record June growth rate as we bounced out of the first wave of the pandemic.
“This monthly print shows the continual damaging effects of the pandemic, sapping any consumer and business confidence and now the UK economy is nearly 8% smaller than it was in January this year. As talks continue between Prime Minister Boris Johnson and the EU President von der Leyen, with the deadline to reach an agreement further extended to this Sunday, the outlook for the UK economy looks precarious.
The Prime Minister was perhaps too characteristically upbeat when he said just a month ago that the next few months are going to be ‘bumpy’.”
Dr Jonathan Gillham, PwC chief economist, says October’s GDP report confirms that the UK’s economy was weakening before November’s lockdown – with small firms suffering most.
“Today’s monthly GDP data confirms what we already knew – the economy was slowing ahead of the second national lockdown in November. Overall, there is still a lack of confidence in the economy, with sectors such as accommodation and food – which fell by 14.4% due to tightening COVID-19 restrictions – the worst affected.
“Sectors such as air and rail transport, creative arts and entertainment, and travel agencies have recovered less than half of their pre-February levels of output. In line with this, the data published today suggests that much of the growth in the economy is coming from larger businesses, with smaller businesses the most adversely affected – particularly those that are customer facing and based in the service sector.”
Economy slows to a ‘snail’s pace’
Economic growth across the UK slowed to a ‘snail’s pace’ in October, says Ruth Gregory, senior UK Economist at Capital Economics.
The 0.4% m/m rise in real GDP was a far cry from the 2.2% m/m and 1.1% m/m gains seen in August and September respectively and suggests that the recovery had already burnt out even before November’s lockdown was imposed.
That left the economy still 7.9% smaller than before the crisis, a bigger shortfall than during the whole of the Global Financial Crisis.
She also fears that the economy faces a “difficult few months”, and probably shrank vey sharply during last month’s English lockdown.
The second lockdown probably caused the economy to contract sharply in November, perhaps by up to 8% m/m, and the strict COVID-19 regional tier system put in place in December will limit the rebound in activity in the coming months.
But more encouragingly, Gregory predicts the economy could reach its pre-pandemic level in early 2022, thanks to a “vaccine bounce” in 2021.
The UK has managed to sign one free trade deal today – with Singapore.
International trade secretary Liz Truss said the deal shows the UK is “re-emerging as a fully independent nation, and a major force in global trade.”
The new deal covers more than £17bn of trade in goods and services.
Singapore’s Minister for Trade and Industry, Chan Chun Sing, said the agreement should provide certainty to businesses.
“The agreement will provide continuity and certainty for businesses in both countries and send a strong signal of the UK’s commitment to deepen its engagement of the region.”
But, the agreement largely replicates an existing EU-Singapore pact, as our story explains:
It removes tariffs, gives both countries access to each other’s markets in services and cuts non-tariff barriers in electronics, cars and vehicle parts, pharmaceutical products, medical devices and renewable energy generation, the ministry said.
Duties will be eliminated by November 2024, the same timeline as the agreement between the EU and Singapore, a former British colony that maintains close links with London.
Full story: UK economy almost at a standstill before new Covid restrictions hit
Britain’s economic recovery from the first wave of the Covid-19 had almost come to a standstill as fresh restrictions affecting the hospitality sector were imposed in the autumn, our economics editor Larry Elliott writes:
Figures from the Office for National Statistics showed that national output – or gross domestic product – rose by 0.4% in October.
Although it was the sixth successive monthly increase since May, the ONS said activity remained almost 8% below its pre-crisis level.
The economy is expected to contract in November as a result of the four-week lockdown in England but the ONS said there were already signs of the tightening of restrictions having an impact on the service sector in October.
A breakdown of GDP into its three main sectors showed production rising by 1.3% in October, construction up by 1% but services – which account for around 80% of GDP – increasing by just 0.2%.
Within services, the ONS said tougher social distancing rules, which included a firebreak in Wales and the tiering system in England, meant output of accommodation and food retailing fell by more than 14%.
ONS figures show a marked deceleration in growth since the summer. The economy expanded by 9.1% in June, 6.3% in July, 2.2% in August and 1.1% in September, before a further slowdown in October….
Here’s the full story:
The UK economy is likely to come to a ‘juddering halt’ this quarter, warns Rory Macqueen, Principal Economist at the NIESR thinktank:
“Today’s ONS data show that the fourth quarter got off to a ponderous start even before the second lockdown in England was imposed. Survey data suggest that, although the economic impact of the second lockdown in November was smaller than the first, it does seem more likely than not that the final quarter of the year will show little or no overall growth in GDP with the recovery shuddering to a halt.
While the rollout of the vaccine offers some positive momentum, the final act of Brexit is likely to offset that in the early months of 2021.”
The slowdown in UK growth should ‘focus political minds’ on the importance of reaching a free trade deal with the EU, says Professor Costas Milas of University of Liverpool:
GDP remained, in October 2020, a massive 8% below its pre-pandemic level. That said, some good news might come out of this significant loss of GDP momentum if, and only if, it helps focus political minds to avoid a no-deal Brexit.
If anything, GDP will continue to underperform in November 2020 because government stringency measures remained elevated in an attempt to suppress the virus. GDP is expected to bounce back, albeit quite slowly, in December 2020 because of positive Google mobility developments (a proxy for consumer expenditure) in response to stringency measures being relaxed.
Four sectors of the UK services sector are still more 50% smaller than in February.
Travel agents, air transport, creative arts and entertainment, and rail transport have all suffered the worst hit to growth.
That reflects the ongoing travel curbs, and the closures of theatres, galleries and cinemas this year.
Postal services, retail (excluding motor repairs) and repairs of computers and other household goods are all larger than in February.
October slowdown: the key points
The ONS has also looked at the overall impact of the Covid-19 pandemic on the UK economy in October. Here are the key points:
- Monthly gross domestic product (GDP) rose by 0.4% during October 2020, but was 7.9% below February 2020 levels.
- October 2020 saw the sixth consecutive month of growth, but the rate of recovery has slowed each month since the largest rise of 9.1% in June 2020.
- Across services, the monthly growth was driven by health, wholesale, retail and motor trades, and education, while accommodation and food and beverage service activities declined.
- Within manufacturing there was widespread growth, led by a rise of 6.8% in motor vehicle production.
- Monthly construction output growth slowed to 1.0% in October 2020, the sixth consecutive month of growth but the lowest rise in that time, with the level of construction output in October 2020 still 6.4% below the February 2020 level.
James Sproule, chief economist of Handelsbanken in the UK, says the UK economy faces a ‘rocky few months’:
The pace of growth has fallen considerably since the relative highs seen in August and September – with accommodation and food services continuing to face significant difficulties.
“The spike in restaurant activity in August, driven by the ‘eat out to help out’ program, was successful in driving revenues up at the time. This rate of recovery was clearly not sustainable and we are seeing all face to face activities lagging. The wide-spread roll out of the vaccine is clearly going to be necessary for a full recovery.
“The November GDP numbers will reflect the impact of the secondary lockdown and only as we look at the data post this can we begin to assess the impact of the UK’s departure from the EU.
“A rocky few months ahead seems certain.”
KPMG: Economy to shrink in Q4
Yael Selfin, chief economist at KPMG UK, predicts the UK economy will shrink in the October-December quarter – and suffer a more severe downturn than major rivals for 2020.
“Overall, the UK economy could shrink by 2% in the last quarter of 2020, taking the contraction for the year as a whole to 11.2%, one of the worst among developed economies.
She also warns that the recovery will be much weaker if the UK and EU can’t agree a free trade deal:
“GDP could rise by 6.1% next year in the event we get a Brexit deal, while growth could prove lower at 3.3% if there is no deal with a small recession at the start of the year.
“October data shows significant slowdown in activity ahead of the second lockdown in November. Hospitality services were particularly hit after a summer reprieve, with prospects expected to remain gloomy until later next year when restrictions are likely lifted fully.”
October’s slowdown is likely to be followed by a ‘significant’ fall in GDP in November, warns the British Chambers of Commerce’s head of economics, Suren Thiru.
“The sharp slowdown in economic output in October reflected the squeeze on activity from the re-introduction of tighter coronavirus restrictions, including the tier system in England. Firms in hospitality, who are most acutely exposed to the renewed restrictions, suffering particularly badly in the month.
“October’s slowdown is likely to be followed by a significant contraction in economic activity in November as the effects of the second coronavirus lockdown are felt, despite the prospect of a temporary boost from Brexit stockpiling.
Thiru adds that it’s ‘critically important’ to reach a UK-EU trade deal:
While a vaccine offers real hope, failure to avoid a disorderly end to the transition period or further lockdown restrictions before a mass vaccine rollout is achieved would severely drag on any economic recovery.
“Mass testing remains crucial to keeping the economy moving until the Covid-19 vaccine is fully rolled out. Achieving a UK-EU trade deal is critically important to avoid a damaging cliff edge for the UK economy. With time running out, government must work urgently to close the major gaps in the guidance available to help businesses to prepare for the end of the transition period.”
Accommodation and food services were a large drag on growth
The health and social work sector made a strong positive contribution to growth in October, as did manufacturing.
But accommodation and food services shrank dramatically as Covid-19 restrictions were imposed.
As this chart shows, many other parts of the economy did keep growing, though.
The ONS says:
Monthly GDP in October 2020 increased by 0.4%, where manufacturing had the largest contribution, as manufacturing of transport equipment saw increased demand.
Health also had a large positive contribution in October as there was an increase in the volume of activity. Accommodation and food service activities acted as a large drag on growth in October as tightening coronavirus measures had an adverse impact on trade and a subsequent lack of demand.
Since July 2020, there has been “a loss in momentum across all main sectors” of the UK economy, warns the Office for National Statistics in today’s GDP report.
The services sector only grew by 0.2% in October, reflecting the new restrictions imposed on hospitality companies.
Manufacturing did better, with growth of 1.7%, while construction grew 1.0%.
But all three sectors are much smaller than at the start of the year:
UK GDP: Economy slowed in October
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Britain’s economy has slowed sharply as the rise in Covid-19 infections and tiered restrictions imposed across the country hit activity.
UK GDP rose by just 0.4% in October, new figures from the Office for National Statistics show.
That’s the weakest monthly expansion since the UK returned to growth in May after the first Covid-19 lockdown.
It shows that the economy was already weakening before last month’s English lockdown. It also means the UK economy is still 7.9% lower than the levels seen in February 2020, before the pandemic struck the country.
The Office for National Statistics says:
With a backdrop of further national measures being introduced in response to the coronavirus pandemic, monthly GDP grew by 0.4% in October 2020. This is the sixth consecutive monthly increase following a record fall of 19.5% in April 2020.
October 2020 GDP is now 23.4% higher than its April 2020 low. However, it remains 7.9% below the levels seen in February 2020, before the full impact of the coronavirus pandemic.
Covid-19 infections rose sharply through October, as the second wave of the virus hit the UK hard.
During October, Boris Johnson announced the three-tier system for England which saw millions of households – particularly in the North – living under tougher restrictions. Scotland introduced its own restrictions – including a ban on drinking indoors at pubs and restaurants – while Wales went into a firebreak lockdown.
Also coming up today
The pound may come under pressure after Boris Johnson and Ursula Von Der Leyen agreed to extend the Brexit trade deal talks until Sunday.
No breakthrough came during their dinner in Brussels, with Von der Leyen tweeted diplomatically that “We had a lively and interesting discussion on the state of play on outstanding issues”
A senior No 10 source said:
“The prime minister and Von der Leyen had a frank discussion about the significant obstacles which remain in the negotiations.
“Very large gaps remain between the two sides and it is still unclear whether these can be bridged.”
Sterling is currently down around half a cent against the US dollar at $1.335, and half a eurocent at €1.105.
In the eurozone, the European Central Bank is expected to unveil yet another stimulus package later today, to support Europe’s struggling economy through the winter.
- 7am GMT: UK GDP and trade balance for October
- 12.45pm GMT: European Central Bank interest rate decision
- 1.30pm GMT: ECB press conference
- 1.30pm GMT: US weekly jobless figures