UK GDP: Lockdown 2 Downturn Not as Severe as Forecast

UK GDP decline

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The UK's economy contracted by 2.6% during November 2020, a decline that will not be surprising given the UK economy was subject to a second national lockdown owing to rising covid-19 cases.

However, the decline is less than economists had expected as the consensus estimate stood at -5.7%.

In fact the consensus appears to have been overly pessimistic in other areas too: GDP growth for the three months to November stood at 4.1% said the ONS, which is higher than the 3.4% expected.

"All things considered, the 2.6% fall in November GDP was pretty mild given the national lockdown that was in place at the time," says James Smith, Developed Markets Economist at ING Bank N.V.

Monthly GDP decline

In the year to November GDP declined by 8.9%, which is less than a sharper -12.1% expected by forecasters.

The ONS reports that output in the services sector - which accounts for more than 80% of UK economic output - fell by 3.4% in November as customer-facing businesses were forced to close.

Decline in services leads contraction

Of note, the decline in construction output was less severe than the market had been expecting with a consensus forecast of -8.1% for the sector being upended by an official reading of -1.4%.

Elsewhere, the decline in manufacturing production read at 3.8%, better than the decline of 4.8% the market had expected.

Industrial production output stood at -4.7%, which is worse than the -4.2% economists had forecast.

"As expected, the impact of the second lockdown was significantly smaller than the downturn seen in the spring. Steps taken by businesses earlier in the year to Covid-proof their operations – combined with the time-limited nature of the restrictions, and schools remaining open – meant more companies were able to continue trading safely," says Alpesh Paleja, CBI Lead Economist.

Looking ahead, Paleja says a tougher lockdown called on January 03 means a bigger hit to the economy lies ahead.

"Nonetheless, with vaccine rollout gathering pace, there are tangible reasons for optimism later in 2021," says Paleja.

The closure of schools is being tipped to be the single most important factor for the UK economy in the third major national lockdown, with economists saying the move could knock 2.0% off economic growth.

Owing to the new lockdown, the near-term outlook "now looks much worse than before," says Kallum Pickering, an economist at Berenberg Bank.

Instead of a gain of 3.0% quarter-on-quarter in the first quarter of 2022 Pickering now projects a 2.0% decline to transpire.

The better-than-expected GDP data for November could well mean that GDP for the final quarter of 2020 does not contract.

"With a rebound (or even a flat outturn) in December, the economy would avoid contraction in Q4 overall," says Hann-Ju Ho, Economist at Lloyds Bank.

The third national lockdown could meanwhile trigger a contraction in the first quarter of 2021. A recession requires two consecutive quarters of decline: therefore a positive reading for the final quarter of 2020 could mean a technical recession is avoided in the event of a more severe decline in the first quarter of 2021.

"Given that the current lockdowns are likely to remain in place until mid to late March before being gradually unwound, it is likely that first quarter GDP will shrink by around 2-3%," says Smith.

"With tighter containment measures in the New Year across the UK, a decline in GDP in the first quarter seems likely. The rollout of vaccines offers hope for an eventual move towards some semblance of pre-Covid normality," says Ho.

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