Investment in United Kingdom

United Kingdom - Investment

Activity rebounds in the second quarter as the economy reopens

GDP rebounded in the second quarter, growing 4.8% on a seasonally-adjusted quarter-on-quarter basis and contrasting the 1.6% contraction logged in the first quarter. The reading was aided by the marked easing of lockdown restrictions in the period, both at home and abroad, although the economy was still 2.2% below its pre-pandemic level in June.

The upturn reflected a broad-based improvement in private consumption, public spending, fixed investment and exports. Private consumption bounced back, growing 7.3% in seasonally-adjusted quarter-on-quarter terms in Q2 and contrasting the 4.4% contraction in Q1. Public consumption accelerated to a 6.1% expansion in Q2 (Q1: +1.5% s.a. qoq), reflecting the reopening of schools and a rise in non-Covid-19-related healthcare activity. Fixed investment dropped at a slower rate of 0.5% in Q2, following the 1.7% decrease in the prior quarter. While government investment declined, business investment picked up amid improved sentiment among firms.

Exports of goods and services increased 3.0% on a seasonally-adjusted quarterly basis in the second quarter, which contrasted the first quarter's 6.1% contraction. In addition, imports of goods and services rebounded, growing 6.5% in Q2 (Q1: -13.5% s.a. qoq). As a result, the external sector subtracted from growth in the period.

On an annual basis, the economy bounced back in Q2, with GDP growing 22.2% and contrasting the previous period's 6.1% fall.

Momentum should slow in H2 as pent-up demand eases and government labor market support is likely wound down. Moreover, the surge in Covid-19 cases appeared to dent activity early in Q3 due to ensuing supply disruptions as workers were forced to self-isolate. However, the overall expansion should be robust nonetheless, thanks to strong private consumption as households continue to run down their savings.

Kallum Pickering, senior economist at Berenberg, commented:

“Despite persistent virus-related uncertainties and intensifying supply-chain issues that are holding back production, the UK remains on track to fully recover from the pandemic shock by Q1 2022.”

FocusEconomics panelists expect the economy to expand 6.6% in 2021, which is up 0.1 percentage points from last month’s forecast, and to expand 5.4% in 2022.