Encouraging GDP figures but UK faces a ‘long haul’ recovery

12 June 2021

The UK economy grew by 2.3% in April as the easing of Covid-19 lockdown restrictions fuelled a rise in consumer spending.

The Office for National Statistics said April marked the third consecutive month of economic growth and the fastest growth since July 2020.

While April’s figures remain 3.7% below the pre-pandemic levels seen in February 2020, they are now 1.2% above the initial recovery peak in October 2020.

April’s gains were largely driven by a 3.4% rise in the service sector, as consumer-facing services reopened, the ONS said. In contrast, the construction sector contracted by 2% in April following a strong March, while production, mining and quarrying output fell sharply by 15% because of planned temporary closures for maintenance of oil field production sites.

Hinesh Patel, portfolio manager at Quilter Investors, welcomed the news: “Given this GDP reading covers April and doesn’t quite take into account all of the lockdown easing we have seen to date, the government will be pleased with the direction the economy is heading. Consumers are clearly making up for lost time and the government will be hoping they continue to spend the lockdown savings many have been fortunate to accumulate.

“Real-time data, such as restaurant and holiday bookings, also remains robust after the initial surge in April and we are seeing discretionary spending hold up as things look to get back to normal. There is obviously uncertainty about the last step of easing going ahead on time and Rishi Sunak [the Chancellor] will not want any delay to be long lasting.

“But, given the depths of where we were last year, the economy is clearly returning to health.”

Patel said much of the optimism has already been fairly priced into markets and inflationary concerns may prompt the Bank of England to move quicker than expected.

However, Patel warned that the economy may never return to how it was pre-Covid-19, having undergone significant structural changes.

Patel added: “The economy will still need to be nursed along as it returns to sustainable growth. But the point will come where the spending taps will need to be switched off and the economy stand on its own two feet again. When this is remains to be seen but for now the sun is shining and the roof is being fixed.”

Inflation – pernicious force

Kevin Brown, savings specialist at Scottish Friendly, said April’s figures demonstrate that the UK is back on a solid path to recovery, but warned of inflationary concerns.

“Barring any unexpected upset the economy looks on track to be fully recovered by the third quarter of the year, which would be a remarkable turnaround.

“In the context of a heating up economy, rising prices will kick in as demand soars from consumers. People will have more money in their pocket and that is a good thing. But this is a worrying time for cash savers because their deposits just won’t keep up with the inflation that is coming. Inflation is a pernicious force because it’s hard to notice it happening.

“Traditional savings rates were not great before the pandemic but at least some best buys kept up with inflation. Now though you’d be hard pressed to find anything paying over 1% – well below where we are with inflation already. The message then is that those holding cash need to think about whether it’s really in the right place.”

Looking ahead, Danni Hewson, analyst at AJ Bell, took a cautious tone: “The feeling is the recovery is lumpy and delays in lifting restrictions could make it even more bumpy.  The service sector is still far below it’s pre-pandemic levels and many in the hospitality sector are concerned about making it through the summer if social distancing continues to constrain sales.

“And the next few months will bring challenges as programmes like furlough begin to unravel and there have already been calls for the chancellor to consider extending the scheme into the autumn for sectors unable to get back to fighting strength.

“Yes, there is much to celebrate but there’s also a note of caution, we’ve been here before and we understand how fragile recovery can be and how quickly the pandemic can tilt the field.”

Derrick Dunne, CEO at Beaufort Investment, echoed the sentiment. “Today’s data from the ONS is the strongest sign yet that it’s full steam ahead for the economic recovery, though we still can’t escape the likelihood of bumps along the way.

“The biggest boost came from the services sector thanks especially to consumer spending at the newly reopened shops and restaurants, and the continued return to in-person learning. The construction and production sectors both contracted, but not by enough to mar an otherwise impressive outlook.

“Nevertheless, we’re not yet out of the economic woods – far from it. The British Chamber of Commerce this week predicted that UK GDP will grow by 6.8% this year in the sharpest annual rise since records began, but it has also warned that a delay to the easing of lockdown restrictions could significantly slow the return to pre-pandemic levels.”

Dunne said investors should ensure that their long term plans are equipped to endure a “long-haul” recovery.

Meanwhile, Ian Warwick, managing partner at Deepbridge Capital, said there should continue to be incentives for scale-up businesses which will be crucial to the economic recovery, particularly those in high-growth sectors such as digital technologies and life sciences.

Warwick said: “Government initiatives such as the Enterprise Investment Scheme (EIS) have never been more important for helping entrepreneurs and innovators source the funding they require, whilst also offering private investors with tax incentives to develop UK-supporting private equity portfolios.

“It is evident that there is considerable demand from investors and financial advisers alike to invest in early-stage UK companies which we believe will be at the forefront of our economic recovery.”

Professional Paraplanner