Door Open to a Stronger than Expected Economic Rebound

UK saved more in the first lockdown

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Data shows UK households to have saved more money than economists had expected in the first three months of 2021, suggesting the post-lockdown recovery could eclipse existing economic growth forecasts.

However, we are told by one economist that the post-lockdown spike in economic expansion will eventually give way to sluggish economic growth as the UK's structural disadvantages begin to bite once more.

The ONS on Wednesday reported the final set of data covering the first three months of 2021 and they reveal a larger-than-expected rebound in the household saving rate.

The data shows a 3.2% quarter-on-quarter decline in consumer spending, largely a response to the January lockdown.

This is a revision from the previous 2.6% quarter-on-quarter decline reported by the ONS.

Meanwhile, there was a 0.1% quarter-on-quarter rise in nominal household income reported, giving a household saving rate rose of 19.9%, up from 16.1% in the final quarter of 2020.

"That means at around £190BN (8.5% of 2019 GDP) the stock of excess savings that households have built up during lockdowns is a bit bigger than we expected," says Paul Dales, Chief UK Economist at Capital Economics.

UK household savings

"This represents a larger upside risk to the pace and duration of the economic recovery further ahead should households choose to spend it. As such, it adds to our view that the recovery will be a bit faster and more complete than most other forecasters expect," says Dales.

The ONS reported UK GDP shrank 1.6 in the first quarter when compared to the previous quarter, while the year-on-year decline came in at 6.1.

Analysis from Pantheon Macroeconomics shows that the UK economy remains the hardest hit in the G7 by Covid-19 in the first quarter of the year, with GDP 8.8% below its further quarter 2019 peak, more severe than the 0.9% shortfall in the U.S., 4.7% in France and 5.0% in Germany.

"The U.K. however, probably was the G7’s laggard for the last time in Q1, as the rapid rollout of vaccines has laid the foundations for a sustainable recovery," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

Pantheon Macroeconomics forecast GDP to have risen by 5.3% quarter-on-quarter in the second quarter and they expect it will increase by a further 2.0% the third quarter, before then narrowly exceeding its prior peak in the first quarter of 2022.

But regarding the longer-term outlook, Pantheon's expectations for the UK economy make for dire reading.

Tombs says:

"Thereafter, however, the recovery likely will lose momentum and the U.K. will slip back towards the bottom of the pack, as other countries close the vaccination gap.

"On current plans, the U.K. government is set to tighten fiscal policy significantly in 2022, through renewed cuts to departments’ expenditure and a freeze of income tax thresholds. Exports, meanwhile, likely will remain held back by the new trade barriers imposed at the start of this year.

"Sluggish growth in the workforce, reflecting an ageing domestic population, lower levels of immigration than in the 2010s, and the absence of government policies to boost participation, also will hold the U.K. back. A

Pantheon Macroeconomics forecast quarter-on-quarter GDP growth to decelerate to an average rate of 0.6% in 2022 and 0.1% in 2023.