UK economy holds up during second wave of coronavirus

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The UK economy showed resilience in the second wave of coronavirus, growing strongly in March and contracting only 1.5 per cent in the first quarter of 2021.

The official figures suggest a brighter outlook for the economy over the summer with the coronavirus recovery stronger than expected in recent months.

The Office for National Statistics also said on Wednesday that Britain’s exports and imports continued to recover in March. However, there was a pattern of less trade with the EU, following the imposition of greater border restrictions after the end of the Brexit transition period in January.

Chancellor Rishi Sunak welcomed the figures, saying the economy was showing “promising signs” after a “difficult start to this year”.

The first-quarter contraction of 1.5 per cent was in line with economists’ expectations and caused by the third lockdown in January which led the size of the economy to shrink 2.5 per cent.

Growth exceeded expectations in February and March as companies adapted to the restrictions and consumers became ever more willing to spend online, pointing to continued rapid growth in the second quarter.

Howard Archer, chief economic adviser to the EY Item Club, said the economy had been “pretty resilient” in the first three months of the year with the lockdown causing “much less damage than had been feared at the start of the quarter”.

As recently as February, the Bank of England had expected a 4.2 per cent drop in gross domestic product in the first quarter.

In March, the UK’s GDP exceeded expectations and rose 2.1 per cent, the fastest monthly growth rate since August last year, leaving the economy only 5.9 per cent smaller than it was in February 2020 before the pandemic struck.

After the first quarter figures, the UK still has the worst pandemic economic record in the G7 group of nations, but this is likely to change soon, following the upswing in March.

Steffan Ball, UK economist at Goldman Sachs, raised the bank’s UK economic growth forecast to 8.1 per cent on Wednesday. “The upside surprise to March GDP and the upward revision to February imply more growth momentum going into the second quarter,” he said.

Ruth Gregory, senior UK economist at Capital Economics, said the economy was now on track to reach its pre-pandemic level before the end of the year and well before the BoE forecast last week. “The burst of growth in March shows that the recovery has been gathering momentum more quickly than we had thought,” she said.

In the first quarter, the economy was bolstered by government spending, partly a result of increased health activity from vaccinations and coronavirus testing, at the same time as consumer spending and business investment fell, as a result of the third lockdown.

But in March, when the Covid-19 case numbers fell fast, growth was balanced with services rising 1.9 per cent on the back of schools reopening their classrooms and strong retail sales, with production rising 1.8 per cent. There was also a boom in construction of 5.8 per cent as both new work and repairs grew.

Monthly trade statistics, released at the same time as the GDP figures, showed a continued shift away from trade with the EU and towards non-EU countries, despite a gradual return to more normal levels of trading with the EU after the end of the Brexit transition period.

Imports from EU countries, excluding precious metals, increased 4.5 per cent in March to £17.8bn, according to figures from the Office for National Statistics released on Wednesday. Imports from outside the EU increased 8.4 per cent, to £19.3bn.

The UK imported more from outside the EU than within it for the first time since comparable records began in 1997, according to official statistics, as businesses increased trade during an uneven global emergence from the pandemic. 

But the ONS said continued volatility meant it was too early to assess whether this reflected short-term disruption or longer term changes, as trade began to recover after the disruption of Covid-19.

March’s data suggests a partial boost for the UK’s international trade, after significant falls due to both the pandemic and Britain’s departure from the EU.

Darren Morgan, director of economic statistics at the ONS, said that exports to the EU were now almost back at December’s levels. “However, imports from Europe remained sluggish in the first three months of the year, being outstripped by non-EU imports for the first time on record.”

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