U.K. Recession Risk Eases as GDP Declines Less Than Forecast - BLOOMBERG
BY David Goodman and Andrew Atkinson
(Bloomberg) -- The U.K. economy shrank less than expected during the lockdown in November, making it possible the nation will avoid a double-dip recession.
The 2.6% contraction was 2 percentage points less severe than analysts had forecast. It means the economy will grow in the fourth quarter unless December, when restrictions eased, records a decline of 1%.
The figures suggest that consumers and companies adapted better to the second round of coronavirus curbs than they did in the first half of 2020. A potentially larger hit is coming this month with schools and all non-essential shops closed, which has kept up pressure on the government and Bank of England to do more to protect people unable to work. Prime Minister Boris Johnson is pinning his hopes on the vaccine to revive growth.
â€œItâ€™s clear things will get harder before they get better and todayâ€™s figures highlight the scale of the challenge we face,â€ Chancellor of the Exchequer Rishi Sunak said in a statement. â€œBut there are reasons to be hopeful. Our vaccine roll-out is well under way.â€
The better reading was aided by growth in the manufacturing and construction industries, which were allowed to remain operating, and a smaller-than-expected drop in services. The hospitality industry only fell half as much as it did in April.
Forecasters, including the BOE, were anticipating a contraction for the fourth quarter, but many are already upgrading their outlooks. December will likely be boosted by a reopening of some stores, alongside the traditional increase in Christmas spending.
Dan Hanson of Bloomberg Economics expects growth of 0.6% during the quarter, with output in December alone rising 1%, and says GDP may fall less than forecast in the first three months of 2021.
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â€œLooking beyond the first quarter, we continue to forecast growth will pick up sharply as the economy reaps the benefits of the loosening of restrictions and the vaccine rollout program. But with a meaningful opening of the economy only likely from May, the recovery is likely to be more evenly split over 2Q and 3Q.â€
BOE Deputy Governor Ben Broadbent said this week the U.K. economy could be stronger than output data suggest as consumers switched their spending in response to the pandemic. He noted retail spending moved to online traders when stores were closed, leaving the overall performance of the sector surprisingly strong.
Still, while the overall decline was less than expected, a 2.6% drop is very large by historical standards and deeper than anything seen during the financial crisis. Gross domestic product remains 8.5% below February, before the pandemic struck.
â€œUnder normal circumstances, this would still count as a huge contraction,â€ said Melissa Davies, chief economist at Redburn. â€œIt will potentially take several years for the U.K. to claw back its Covid GDP losses.â€
The better reading will also be scant consolation for many of the nationâ€™s beleaguered companies, which are now struggling through a more severe lockdown and with new trading rules after the U.K.â€™s exit from the European Union.
The current restrictions, imposed after a surge in infections threatened to overwhelm hospitals, is due to last until mid-February at least. Crucially, it includes the closure of schools, which will hit the economy by reducing public-sector output and forcing some people to stop working in order to look after children at home.
Thatâ€™s left Sunak under pressure from a powerful bloc of Conservative lawmakers and business groups to step up coronavirus assistance. The British Chambers of Commerce warned Thursday that many businesses are â€œon their knees.â€