The hit to the UK economy in 2021 from the covid-19 crisis looks to be smaller than expected. A sizeable increase in savings by UK households means a strong rebound in growth will likely take place over the coming months, even if economists hotly contest the scale of that boost.
UK GBP Forecast
The size of the UK’s economy as measured by Gross Domestic Product (GDP) shrank 7.3% in the final quarter of 2020 when compared to the same time a year prior, which is less than the -7.8% the market was expecting and has meant economists will have to raise their growth forecasts for 2021.
The figure announced is also a smaller decline than the -7.8% reported in previously published provisional data.
The economy actually grew 1.3% in the final quarter compared to the third quarter of 2020, which is greater than the 1.0% the market was expecting.
Taking 2020 as a whole, the ONS says the economy shrank 9.8%, which is slightly less than the previous estimate of 9.90%.
“The upward revision to GDP in the second half of 2020 means the economy does not have quite as far to recover from the COVID-19 crisis. And Q4’s high saving rate leaves plenty of scope for a rapid rebound in 2021, spurred and financed by consumers,” says Ruth Gregory, Senior UK Economist at Capital Economics.
But, the big drop that occurred in the second quarter of 2020 – when the covid-19 panic was at its greatest – was actually deeper than previously estimated, with the ONS saying the GDP drop in the April-June quarter is estimated to have been 19.5%, a downwards revision of 0.5 percentage points.
Looking ahead, the ingredients for a strong economic rebound over the coming months will likely be driven by spending off the pent-up savings accrued by UK households during the lockdown.
The household saving ratio increased to 16.1% in the fourth quarter, increasing from a revised 14.3% in Quarter 3 2020.
Over the year 2020, the household saving ratio rose sharply, reaching a record high of 16.3%, compared with 6.8% in 2019. Institutional economists and the Bank of England have said over recent months that the spending of pent-up savings is likely to trigger a sizeable economic rebound over coming weeks as service-orientated businesses are allowed to reopen once more.
When looking at how the UK performed relative to other countries, the ONS says several ways of doing so.
Because national accounting is done differently in different countries, it is hard to arrive at an absolute and decisive comparison.
The ONS has acknowledged the challenges and says it is useful to compare nominal and real estimates of GDP and estimates excluding government expenditure. The main difference between nominal GDP and real GDP is the adjustment for inflation. Since nominal GDP is calculated using current prices, it does not require any adjustments for inflation.
As shown above, when real GDP is taken into account, the UK is close to the bottom of the rankings, but when nominal GDP is taken into account, the UK fares better.
However, Samuel Tombs, UK Economist at Pantheon Macroeconomics, says the UK economy remained the hardest hit in the G7 by Covid-19 in the fourth quarter, with GDP still 7.3% below its peak.
He says this weakness cannot be attributed to how the ONS measures real government expenditure, which in Q4 actually rose 0.3% year-on-year.