Investment in United Kingdom

United Kingdom - Investment

GDP records sharpest contraction since Q2 2020 in Q1 amid third lockdown

GDP dropped 1.5% on a seasonally-adjusted quarter-on-quarter basis in the first quarter, contrasting the 1.3% expansion seen in the fourth quarter of last year. Q1's reading marked the sharpest contraction since Q2 2020, and was driven by the third lockdown imposed from the start of the year. That said, the decline was far milder than at the height of the first lockdown, in a sign that both consumers and firms are better able to work around restrictions. Moreover, the economy bounced back sharply in March thanks to the reopening of schools, a surge in retail sales and a stronger construction sector, boding well for momentum ahead.

The downturn in Q1 as a whole reflected contractions in private consumption, fixed investment and exports. Private consumption contracted 3.8% in Q1 (Q4 2020: -1.6% s.a. qoq) amid the closure of shops and the hospitality sector. Government consumption grew at the slowest pace since Q2 2020, expanding 2.6% (Q4 2020: +6.7% s.a. qoq), influenced by the closure of schools for most of the first quarter. Fixed investment contracted 2.3% in Q1 (Q4 2020: +4.4% s.a. qoq).

Exports of goods and services contracted 7.5% in Q1 (Q4 2020: +6.1% s.a. qoq), amid new trading restrictions with the EU. In addition, imports of goods and services deteriorated, contracting 13.9% in Q1 (Q4 2020: +11.0% s.a. qoq).

On an annual basis, GDP dropped 6.1% in Q1, up from the previous period's 7.3% fall.

The economy should gain substantial steam from Q2 onwards, as the substantial easing of Covid-19 restrictions, the rapid vaccination campaign and generous fiscal support unleash pent-up household spending and spur demand.

On the near-term outlook, James Smith, economist at ING, commented:

“Since the start of the second quarter, we’ve also seen a broader improvement in everything from consumer confidence to the number of people taking public transport. In many cases, these more-timely indicators are now exceeding the level they reached last summer, which we think is linked to the public becoming more comfortable with going out and about again following the successful vaccine programme. […] we think GDP growth could come in just shy of 5% in the second quarter.”

FocusEconomics panelists expect the economy to expand 5.2% in 2021, which is up 0.4 percentage points from last month’s forecast, and to expand 5.7% in 2022.