UK GDP: Economy's Boris Bounce Fails to Materialise, March GDP Forecast to Fall 0.5%

Economy due to suffer sharp slowdown

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Despite an array of surveys suggesting the UK economy bounced back strongly in January, largely as a response to the decisive outcome of the December General Election, official data out Wednesday suggests a very limited pick up in activity.

Monthly GDP data from the ONS showed that the economy flatlined in January, recording no growth on the previous month. Markets had forecast a bounce of 0.2%.

Annual GDP growth for January stood at 0.6%, disappointing against market expectations for a reading of 0.9%.

The data suggests that the economy enters the coronavirus crisis on a soft footing and the potential for a notable slowdown is therefore elevated.

“For the economy to have flatlined in January shows that while the Boris bounce may have created a feel-good factor there was no hard economic follow-up," says Ayush Ansal, chief investment officer at Crimson Black Capital. "On this evidence sentiment flared up but quickly fizzled out."

Looking at the various components of the economy, the ONS reports the all-important services sector, which accounts for over 80% of UK economic activity, flatlined at 0% in January.

Services sector data disappoints

Industrial production sank 2.9% on a monthly basis in January while manufacturing production sank 3.6%.

Even without the coronavirus outbreak, the Bank of England would have almost certainly cut interest rates in March based on the incoming data.

"This weak GDP data suggests the UK economy is going into a period of potentially radical uncertainty with zero momentum," says Ansal.

Quarterly GDP

"January’s GDP data are weak enough to suggest that the MPC probably would have cut interest rates anyway later this month, had the coronavirus never spread to Britain. Activity has not rebounded as business surveys implied," says Samuel Tombs, UK Economist at Pantheon Macroeconomics.

Pantheon Macroeconomics see further week data release ahead, including a substantial dip in March as the effects of the coronavirus scare become felt.

"In response to signs of continued underlying weakness, we are revising down our forecast for quarter-on-quarter growth in Q1 to just 0.1%, from 0.3%. This assumes month-to-month growth in GDP of 0.2% in February, followed by a 0.5% decline in March, driven by a plunge in discretionary services spending," says Tombs.

Pantheon look for a 0.3% quarter-on-quarter drop in GDP in Q2, followed by a rebound in Q3.

"The support to demand from lower oil prices, as well as the fiscal and monetary stimulus announced today, should be felt by households and firms in the second half of this year, limiting the chance of a recession taking hold," says Tombs.

In anticipation of a sharp slowdown in UK economic activity, the Bank of England on Wednesday announced a 50 basis point interest rate cut that will take the base interest rate in the UK back to its record low of 0.25%.

In addition, the Bank announced a £100bn funding scheme designed to help support SMEs during the impending slowdown.

The moves come in conjunction with a sizeable increase in spending, due to be announced by the government in the March 2020 budget.

"Today's 50 basis point cut from the BoE has followed on from a host of global easing measures taken over the past fortnight, as central bankers ensure that monetary policy is ultra-accommodative ahead of a widely anticipated economic decline. Perhaps the more important part of today's announcement came in the form of a £100bn funding scheme to help support SMEs through this temporary period of turmoil. While it may not grab the headlines, this type of business support is absolutely necessary to minimise the coronavirus fallout," says Joshua Mahony, Senior Market Analyst at IG.