United Kingdom: Economy bounces back in Q3, although momentum will not carry over to Q4
November 12, 2020
Economic activity rebounded in the third quarter, with GDP growing 15.5% on a seasonally-adjusted quarter-on-quarter basis, contrasting the 19.8% contraction logged in the second quarter. However, the UK has underperformed relative to its European peers recently: Q2’s contraction was deeper than in any EU country and, comparatively, the UK economy did not recoup as much lost ground in the third quarter. On an annual basis, economic activity dropped 9.6% in Q3, up from the previous quarter's 21.5% fall.
The upturn reflected recoveries in private consumption, public spending, fixed investment and exports. Private consumption increased 17.9% in the third quarter, which contrasted the second quarter's 23.7% contraction. Consumer spending was buoyed by the lifting of lockdowns and ample fiscal support through the wage subsidy scheme and measures such as Eat Out to Help Out. Public spending, meanwhile, grew at the fastest pace on record, expanding 7.8% (Q2: -14.6% s.a. qoq). Fixed investment bounced back, growing 15.1% in Q3, contrasting the 21.6% decrease logged in the prior quarter.
Exports of goods and services increased 5.1% on a seasonally-adjusted quarterly basis in the third quarter, which contrasted the second quarter's 11.0% contraction. In addition, imports of goods and services rebounded, growing 13.2% in Q3 (Q2: -22.7% s.a. qoq) as domestic demand picked up.
Prospects for the final quarter are dim. The economy was already losing momentum towards the end of Q3—GDP expanded only 1.1% month-on-month in September, below market expectations—and the reintroduction of the lockdown in England from early November will depress activity much further. Moreover, Brexit uncertainty will be dampening investment.
As analysts at Nomura comment:
“We expect GDP to contract again during Q4 […] though we think the fall in GDP will be far more modest than was the case earlier in the year for various reasons: i) the lockdown is less severe this time, ii) people may interpret the rules more loosely than before, iii) having gone through one lockdown households and firms are in a better position to adapt more quickly and effectively to preserve more of their daily business than before, and iv) there is now light at the end of the tunnel with effective vaccines in the process of being trialed and subsequently (hopefully) approved, which should support confidence ahead of vaccination.”