After a fairly decent Q3, and an expansion of 16%, the UK economy has had a much more troubled Q4, with a lot of speculation in the lead up to today’s numbers that we might have been on the cusp of a double-dip recession.
We already know that the first quarter of this year will see an economic contraction, given the lockdown measures that have been in place since 6 January and which are unlikely to be significantly eased much before the end of March. The Bank of England has already indicated that it thinks the UK economy will contract by 4% in the first quarter of this year, on the basis that while this may be the third lockdown in the space of 12 months, it is by no means anywhere near as onerous as the first lockdown.
So, it’s very welcome that the UK economy managed to expand by 1% in Q4, beating expectations of a 0.5% expansion, meaning that on an annualised basis the economy shrank by -7.8%. Services did most of the heavy lifting in that regard with an expansion of 0.6%, while government spending rose 6.4%. Private consumption was much more subdued contracting 0.2%, compared to a 19.5% expansion in Q3.
While we’ve managed to avoid the prospect of a double-dip recession, it doesn’t change the fact that the UK economy has seen its worst annual contraction, at -9.9%, since 1709. However, while this will no doubt grab all the headlines, there are some positives. Unemployment levels are much lower than our peers, and the rollout of the vaccine means we could be out of lockdown sooner as well, which means the scope for a rebound is closer than we might think. Next month's Budget will be key in helping that process achieve escape velocity.
The manufacturing sector also slowed a touch in December, with a slightly more modest expansion than was predicted, however November’s numbers were revised higher so all in all these numbers were probably as expected. The numbers elicited a tepid response on the part of financial markets, with UK gilt yields slipping back from their recent 11-month peaks, while the pound has held steady at 1.38 against the US dollar and unchanged against the euro. While these numbers aren’t great, they also aren’t overly surprising and when compared to the likes of France, Italy and Spain, are equally as disappointing.
There is a bright side to all of this, particularly when the main focus is likely to be on the headline about the worst annual contraction since 1709. It also depends on whether you consider the glass as being half empty or half full. I lean towards the latter. With the greater flexibility the UK has in terms of fiscal and monetary policy cooperation, it suggests that the recent rise in the pound is likely to continue as we head into the spring, with an expectations of a move towards $1.4000 against the US dollar and 0.8600 against the euro.