UK GDP

The UK economy was hit by a 10 per cent drop in GDP last year, the largest contraction of any G7 country. This is despite the fact that the health effects of Covid were broadly comparable across most other advanced economies, with the UK spending a similar amount of time in lockdown as Germany, France and Spain.

The damage has been disproportionately catastophic for London. Office for National Statistics figures show the capital’s unemployment stands at 6.9 per cent compared to the UK rate of 5.1 per cent.

The chancellor likes to point out that the UK measures GDP differently from other nations and so our headline figure for 2020 was lower than in reality. However, the UK’s economic contraction was still “significantly bigger than Germany’s” and among the lowest in the G7 even when taking these differences into account, according to Capital Economics.

One explanation for the poor performance is our economy’s over-reliance on services. Services – such as financial, legal, education, tourism, hospitality retail and real estate for example – make up 80 per cent of the UK’s GDP, while 14 per cent is construction and just 6 per cent is manufacturing. Shutting down the economy and locking people indoors for most of a year will naturally put a halt to much of the service industry, however there are still lessons to be learnt about the ability of the UK’s ability to handle future shocks. Covid-19 should be a serious wake up call to policymakers that they need to fundamentally alter the make-up of the economy.

As it stands, the UK is far too reliant on a model that sees its workforce act as service providers. Put simply – the UK needs to make things again. This doesn’t mean overturning the changes of the 1980s and trying to restart a swathe of industries that have long disappeared. Nor does it necessarily mean completely gutting or ignoring the financial services industry (this is City A.M. after all).

Instead, the UK needs to build up manufacturing and product development in sectors like green energy, tech, science and pharmaceuticals to ensure the economy can better weather future economic storms. Just as the sensible investor diversifies their portfolio to hedge for inherent market risk, so too should the UK diversify its economy for when the country is hit by future recessions or financial crises. This is particularly salient in the wake of Boris Johnson’s UK-EU trade deal, which included no provisions for services.

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Johnson’s levelling up agenda, and investment in skills training, shows he already understood the need for a larger manufacturing base, but this now needs to be turbocharged. The typical conservative levers to pull would be in the form of tax credits and deductions, much like Rishi Sunak’s recently announced super deduction that aims to stoke private sector investment. However, the government will need to go much further than this.

Theresa May earlier this month told the House of Commons that the only way to drive innovation and growth was through research and development funding.

“If we want an innovation economy what we need to do is to invest and support investment in areas which encourage growth and innovation – that means R and D,” she said.

What better time for a large increase in government R and D funding into green technologies as the UK gets ready to host the 2021 United Nations Climate Change Conference (Cop26)? There is a serious opportunity for this government to make the UK a global leader in renewable energy manufacturing and production, which would future-proof the economy for decades to come.

A readymade example for how increased R and D spending could benefit the UK and create new industries can be seen across the pond, according to Canadian policy wonk Marshall Auerback.

Auerback, a fellow at the Levy Institute think tank, told City A.M.: “The government should take an active role in terms of funding basic research and development…and the private sector can determine the most profitable venues for that R and D development.

“For instance, the foundation of Silicon Valley was largely built on the R and D provided through by US government through the Department of Defence and the National Institute for Health and Science.”

The dual disruptions of Covid-19 and Brexit provide the perfect opportunity for the UK to reset course and forge a dynamic economy for generations to come. Free of EU state aid rules and in a time of mass disruption to the way people work, the UK must embark on growing its economy by increasing its manufacturing base. Let’s hope Johnson takes the advice of former Barack Obama chief of staff Rahm Emanuel and does not let a serious crisis to go to waste.

By Stefan Boscia

Source: City AM

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It says something about the world we’re in that a 9.9% contraction in the UK economy in 2020 is seen as good news by economists. But with the economy expanding by a healthy 1.0% in the fourth quarter of last year, despite November’s lockdown, GDP ended up shrinking slightly less in 2020 than had been feared.

Still, the big story is that the UK economy last year suffered its biggest annual contraction in over 300 years, far worse than anything seen in the Great Depression. A 9.9% decline in GDP is also the largest of any sizeable economy other than Spain. Why has the UK economy been so hard hit by the global pandemic?

Most obviously high levels of infections in the UK have resulted in more severe and sustained restrictions on movement than most other major countries. That has generated a corresponding decline in mobility and economic activity. The UK has had more confirmed COVID-19 deaths as a share of its population than any country other than Slovenia, Belgium and San Marino. Differing national recording practices make such comparisons tricky – that is why excess deaths, the death rate relative to a seasonal norm, are seen as giving a more reliable picture. UK excess deaths during the pandemic exceed every industrialised nation bar Belgium, but are lower than in several middle-income countries including South Africa, Russia and Mexico.

The severity of the pandemic and the UK lockdown explain some but not all of the shortfall in UK GDP. Differences in the composition of GDP, and the way in which public sector output is measured, have also played a part.

As a consumption-heavy economy the UK has been especially badly hit by lockdowns. Consumer spending accounts for 64% of UK GDP, higher than any rich economy other than the US, and far higher than the 53% average for the euro area. Moreover, an unusually high proportion of UK consumer spending, 21%, more than in any G7 nation, goes on so-called socially consumed services such as meals out, leisure activities and holidays. Lockdowns have put paid to such spending, reinforcing the UK downturn.

I thought reduced spending on restaurants and so on might have been offset by increased spending on durables like coffee makers, swivel chairs, monitors, to name three I’ve bought. Yet the latest data, which cover the first nine months of 2020, show that UK consumers reduced spending on durable goods, even as consumers in other G7 countries increased their durable goods purchases.

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The final factor in the outsize decline in activity lies in the way in which UK government activity is measured. Gauging public sector output is difficult. How, for instance, can one begin to measure the ‘output’ of the army, the NHS and schools? Most countries get around this problem by using readily available proxies, such as levels of spending and the number of staff. In recent years UK statisticians developed improved measures using actual ‘outputs’, including the numbers of operations carried out and classroom teaching hours. During the pandemic, with hospitals postponing elective surgery and schools closed, this has resulted in sharp declines in the measured ‘output’ of health and education in the UK, even as public expenditure, and numbers employed, have surged. This better captures the experience of patients and pupils in the last year, but with other countries using input measures, it creates a misleadingly depressed picture of UK GDP relative to other rich countries.

There are two implications from all of this.

First, adjusting for differences in the measurement of public sector output UK GDP probably contracted at a similar rate to other, hard-hit European economies, such as France and Italy, last year. Britain has suffered an unprecedented downturn, albeit one that is not wholly out of line with major European peers.

Second, some of the factors that drove the downturn will, in reverse, help lift it. An easing of restrictions would enable consumers to start spending. Overall consumer wealth and savings have risen over the last year and there is a lot of money sitting on the sidelines. Last week the Bank of England’s chief economist Andy Haldane said that UK consumers had amassed some £250bn during the pandemic and the economy could bounce back like a “coiled spring” once restrictions are eased. The reopening of schools and a return to elective surgery should similarly turbo-charge public sector output this year.

Before we get there we have to navigate the current lockdown that we see depressing GDP by 4.1% in the first quarter. But from spring, and assuming restrictions are eased, we see a powerful recovery unfolding, with GDP rebounding by 3.9% in the second quarter and 5.4% in the third quarter.

However you measure it, 2020 was an awful year for UK growth. 2021 is likely to deliver an exceptional rebound.

By Ian Stewart

Source: Reaction

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UK economy shrank by 9.9% in 2020, the worst annual slump on record amid the Covid-19 pandemic, according to official data released on Friday.

The contraction in 2020 “was more than twice as much as the previous largest annual fall on record” said the Office for National Statistics. It was the biggest fall in annual GDP since the ‘Great Frost’ of 1709, when the economy shrank by 13%.

In December, the economy grew by 1.2%, after shrinking by 2.3% in November, which the ONS said was due to the loosening of some coronavirus lockdown restrictions. It also meant that the UK avoided a “douple dip” recession for the time being.

A double-dip is when the economy briefly recovers from recession, only to quickly sink back, while a recession is generally measured as two consecutive quarters of contraction.

Fourth quarter gross domestic product (GDP) grew by an estimated 1%, following revised 16.1% growth in the previous three months. However , despite two consecutive quarters of growth, GDP is 7.8 below the final quarter of 2019.

The ONS reported increases in services, production and construction output in the final quarter, although the output in these sectors was lower year on year.

Britain has reported Europe’s highest death toll from coronavirus and is among the world’s highest in terms of deaths per head of population as the government struggles to come up with a coherent strategy to combat the pandemic.

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UK IS G7’S ‘LAGGARD’

“The UK economy remained the laggard in the G7 in Q4, with GDP still some 7.8% below its pre-Covid peak. By contrast, GDP in the US was only 2.5% below its Q4 2019 level, Germany was down only 3.9%, France 5.0% and Italy 6.6%,” said Samuel Tombs at Pantheon Economics.

“The UK’s underperformance can’t simply be attributed to the different way the ONS measures government expenditure to most other countries; indeed, it rose by 6.4% quarter on quarter in Q4. Instead, pronounced weakness in households’ spending once again has been the root cause.”

Tombs said real household spending in the fourth quarter was 8.4% below its peak in the corresponding three months of 2019, following a further 0.2% quarter-on-quarter decline, greatly exceeding shortfalls of 2.6% in the US and 6.8% in France.

He added that governments abroad had done more to boost consumption; citing Germany’s across-the-board VAT cut in the second half of last year, and stimulus checks for US households.

“The UK government’s two main initiatives—the Coronavirus Job Retention Scheme and the Self-Employment Income Support Scheme—have focussed on bolstering incomes, not spending, and were extended only at the last minute in the fourth quarter, leading many households to save more than if they had known government support would be ongoing.”

“The modest pick-up in GDP in December is a dead cat bounce; the economy has started 2021 on a very weak footing, due to the third lockdown. We look for a 5% month-to-month decline in GDP in January and a 3.5% quarter-on-quarter drop in Q1 as a whole.”

By Frank Prenesti

Source: ShareCast

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