UK economy rebounds as Covid restrictions are eased

Faster growth and a recovering labour market presents a challenge for the BoE’s loose policy

The UK economy grew by 2.3% in the month of April compared to March as the easing of restrictions helped spur a resurgence in activity, especially in the services sectors. The early estimate of growth was slightly better than consensus expectations of 2.2%. It also means that on a rolling three-month basis, economic growth is back in positive territory (1.5%) for the first time since the end of last year.

Within sectors, overall production sectors saw a fall in output of 1.3%, dragged down mostly by mining and quarrying, which fell sharply (-15%). This was due to planned temporary closures for maintenance of oil field production and should reverse next month.

Manufacturing also fell (-0.3%), which may have partly been caused by the closure of the Suez Canal, which caused difficulties in exporting and importing goods. The biggest drag came from the basic pharmaceutical products and preparations sector, where output fell by 16% over the month, and the manufacture of transport equipment (-2.8%).

Services were the main drivers of the rebound as restrictions were reduced for many public facing services. The biggest beneficiary was the accommodation and food services sector, where activity rose by 44% in April. Though this is an astonishing figure for a single month, it’s worth noting that activity in the sector is still 40.5% lower than in February 2020. Further significant gains are due to follow. Wholesale and retail trade also saw strong gains (+8.9%) along with education services, as schools enjoyed their first full month back this year (+11.1%).

Finally, construction sector output moderated (-2%) after a strong rise in March (+5.8%). Construction output is now 2.3% above its pre-pandemic levels, however, we continue to forecast robust gains this year. We expect this to occur as the evidence from private business surveys suggests that investment is set to accelerate into the second half of the year.

Overall, the latest growth figures are encouraging and we anticipate similar gains for the month of May. This puts the economy on course for over 5% growth for the second quarter as a whole. Private business surveys have remained very strong, but are warning that shortages of materials and parts are forcing manufacturers to raise their prices. 

The Office for National Statistics also reports that the share of those employed and partially furloughed, or on furlough leave, fell 4.5 percentage points to 12.6% - its lowest level since December 2020. The share working at their normal place of work rose 5.7 percentage points to 54.7%, again, back to December 2020 levels.

With unemployment falling to 4.8% in the three months to March, it appears that momentum is building in the labour market, which should help boost consumer confidence and spending. The challenge comes when the government’s furlough scheme is unwound through the summer, but we suspect strong demand should help most workers return to usual employment.

For the Bank of England (BoE), its biggest challenge will be managing expectations of rate rises as growth and the labour market recover. Inflation is trending up over the coming month, largely due to the recovery in energy prices, but also the removal of the VAT discounts from last year.

However, our forecast has CPI inflation falling back below target next year. While the BoE may end its quantitative easing programme this year, our forecast suggests it should keep interest rates on hold for some time, potentially until 2023.

This note was first published on Schroders.com here: https://bit.ly/3viLhCW