UK: Lockdown and Brexit combine to drive GDP 3% lower

UK monthly GDP fell by a sizeable 2.9% in January, though this is clearly quite a bit better than feared.

While the national lockdown shuttered a range of industries, the hit to consumer industries was not quite as bad as it could have been. But what really stands out is health expenditure, where the ramping up of the government's test and trace scheme and vaccine programmes added 0.9% to the GDP figures alone!

As a result, the economy is now around 9% below pre-pandemic levels. However, it's worth remembering that the impact of testing/tracing will presumably unwind as the recovery gathers pace and should theoretically dampen some of the improved growth figures later in the year.

The government's test and trace scheme and vaccine programmes added 0.9% to the GDP figures alone!

Speaking of the recovery, we should begin to see a marked improvement in the GDP figures from March. The return of schools this week will directly boost the ‘education’ section of the GDP numbers and indirectly boost other sectors via lower childcare needs. Meanwhile, latest reports suggest the UK’s vaccine supply is set to increase substantially from next week, raising the possibility that all adults could receive their first dose of the vaccine by the end of May or early June (see scenario chart below).

That suggests both the April reopening - which will permit outdoor dining and shops to resume trading, among other things - and May - which should enable indoor dining, staying in hotels etc. - are likely to go ahead as planned. While we think the vision to remove most social distancing rules by mid-June is uncertain, we're still likely to see a sizable bounce in second-quarter GDP.

There was a huge fall - 40% and 29% in exports and imports to/from the EU in January, respectively (though the ONS has cautioned that the export data isn’t directly comparable). In contrast, manufacturing output fell by 2.3% in January.

It's worth saying, though, that there's a lot of factors at play here. Among other things, the fall will be linked to a) stockpiling in late 2020, allowing businesses to avoid the need to trade in early January, and b) some ripple effects from the Covid-related closure of the ports back in December.

Still, there can be little doubt that some of this damage is down to disruption. Some things have probably improved in the weeks since, given that, for example, major haulage firms have largely resumed deliveries between the UK and the continent (some had paused given the high percentage of wrongly filled-in paperwork).

But there are also signs that firms are still struggling. Recent ONS business surveys show that there is still a small chunk of manufacturers who haven’t been able to export recently, while many are reporting fewer shipments than usual. Unsurprisingly input prices have also been rising more than normal, though some of this will be down to international shipping issues. What’s also telling is that a small - but clearly rising - number of firms in affected sectors are saying they are making changes to their supply chains.