Britain expected to set a hollow record as GDP leaps in third quarter

Britain's third-quarter GDP set to surge followed by Q4 decline but hopes rest on effective Covid-19 vaccine

A woman wearing a protective face covering to combat the coronavirus walks along a quiet street in the City of London on November 10, 2020. Britain's unemployment rate has jumped to 4.8 percent as the coronavirus pandemic destroys a record number of UK jobs, official data showed Tuesday. / AFP / Tolga Akmen
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Economists are expecting “record” third-quarter growth for the UK economy, followed by a sharp contraction in the final three months of the year, as the longer-term outlook brightens thanks to the Covid-19 vaccine breakthrough.

Samy Chaar, chief economist at Swiss private bank Lombard Odier, said the strong rebound in the third quarter will be followed by a decline in fourth-quarter growth of about 5 per cent quarter-on-quarter, which is consistent with a 12-per-cent contraction for the full year. The preliminary third-quarter GDP data for the UK will be released on Thursday.

Just like in other industrialised economies, third quarter GDP growth in the UK should be a record growth quarter as restrictions were gradually lifted throughout the summer.

"Just like in other industrialised economies, third quarter GDP (gross domestic product) growth in the UK should be a record growth quarter as restrictions were gradually lifted throughout the summer," Mr Chaar told The National. "However, the imposition of a new one-month lockdown, with a risk of it being extended, and increased consumer caution mean that the economy will likely fall back into contraction in the fourth quarter."

Output is expected to rebound by 17.5 per cent quarter-on-quarter in the three months ended September 30, according to the Institute of Fiscal Studies, a vast improvement on the record 21.5-per-cent year-on-year contraction in the second quarter, when most of the country was in lockdown.

The IFS said household consumption in particular recovered well in the quarter, driven by the return of capacity, deferred expenditures and additional policy support.

However, the third-quarter figures will “probably show that the recovery was running out of steam even before the latest Covid-19 restrictions were imposed”, said Thomas Pugh at Capital Economics.

During the three months to September 30, shops and restaurants were opened, with Rishi Sunak's Eat Out to Help Out dining discount scheme rolled out to encourage Britons to spend and boost the flagging economy. However, as coronavirus cases started to escalate in September, it led to the government tightening movement restrictions, in turn causing economic activity to stall once again.

Economists say the expected November fall in GDP during the second lockdown won’t be as large as the 19.5-per-cent monthly decline in April, during the first nationwide shutdown, because of the slightly looser restrictions this time around.

Mr Pugh said about 70 per cent of the economy was "effectively closed" during the first lockdown.

"This time, as manufacturing, construction, the housing market and education are expected to stay open, about 20 per cent of the economy will be shuttered. That mostly compromises non-essential retailers, hotels & restaurants, arts & entertainment and some transportation,” he said.

“Even so, if output in those closed sectors fell back to the same level as it did when they were closed in April, that’s enough to reduce the level of GDP in November by about 8 per cent month-on-month.”

The Bank of England injected a further £150 billion ($195bn) of stimulus into the UK economy last week as it warned a second wave of the coronavirus pandemic will lead to a slower, bumpier recovery.

The BoE’s bigger-than-expected bond-buying programme took the total stimulus since the start of the pandemic to £895bn, with the lender lowering the third-quarter forecast to 16.2 per cent from 18.3 per cent. It also said it expects total GDP to fall by 11 per cent this year, worse than the 9.5 per cent it suggested in August.

The central expectation was that the economy would not regain its level from last year until the start of 2022.

However, economist Paul Dales at Capital Economics said an effective Covid-19 vaccine would dramatically improve the country’s economic outlook going forwards.

“It may allow GDP to rise to its pre-virus level a year earlier than otherwise and mean that the unemployment rate peaks at 7 per cent next year instead of 9 per cent,” said Mr Dales.

“If a vaccine becomes more widespread in the first half of next year and the Covid-19 restrictions can be reduced, then the return of people to the shops and pubs would push up GDP quicker and GDP may be able to return to its pre-virus level early in 2022 rather than in 2023.”

Douglas McWilliams at the Centre for Economics and Business Research was similarly optimistic, saying GDP could be back at Q4 2019 levels as early as mid-2021.

“This would give a GDP growth rate next year that might be double digit or close to that,” he tweeted earlier this week.

Mr Dales said while more positive growth would reduce the need for more Quantitative Easing (QE) and negative interest rates, he doubts the BoE would reverse QE or raise rates for many years.

Mr Chaar said increased fiscal support through Rishi Sunak's extension of the furlough scheme until March "should limit the pickup in unemployment and preserve household incomes during the lockdown period".

Sterling rose to a six-month high versus the euro on Wednesday amid optimism that a vaccine against coronavirus would bolster the UK economy and shifting expectations for Brexit and negative interest rates.

The pound benefited as investors judged that a vaccine would be a particular boon to the UK, which has seen its economy ravaged by the coronavirus.

"Since Britain has been disproportionately hit by the virus, it will be disproportionately helped by a vaccine," said Marshall Gittler, head of investment research at BDSwiss Group.