UK economy will bounce back best after being among hardest hit, S&P says
Britain suffered one of the worst global performances during the pandemic, contracting 9.8% last year
Britain’s sharp economic contraction in 2020 – the worst among global major economies – will contribute to a stronger recovery in growth numbers this year and next, according to S&P Global Ratings.
The UK’s economy contracted 9.8 per cent last year, one of the worst declines among 42 of the world’s largest economies, with only Spain suffering a steeper fall in gross domestic product, according to S&P’s new report: Why the UK’s Worse Recession Should Turn into a Stronger Recovery.
The study found that the UK fared far worse among its peers because of its more stringent lockdown to fight the Covid-19 pandemic and the country’s high share of household consumption in GDP, because this was most affected by lockdowns and furlough.
"But just as the UK's larger consumption share exacerbated the downturn compared with its peers, so it will boost the upswing more than elsewhere as restrictions are increasingly lifted,” said S&P Global Ratings senior economist Boris Glass.
“This has already started and is a key reason why we expect stronger growth for the UK over 2021-2022 than for many other European economies. For the UK we forecast cumulative growth of 11 per cent over that period, compared with only 8.7 per cent for the EU.”
Britain suffered the worst contraction in more than 300 years in 2020, with the start of the pandemic forcing the closure of non-essential businesses, shops and schools.
GDP shrank almost 20 per cent during the first nationwide lockdown last spring, with the economy stuttering throughout the rest of the year as the country grappled with the fallout from the disease that has claimed more than 127,000 lives.
Another key reason for the UK's poor economic growth statistics last year was that the Office for National Statistics measures public sector output differently from national statistics institutes elsewhere, S&P said.
“We estimate that the UK growth performance would have been 1 to 3 percentage points better, more in line with its European peers, absent these differences,” said Mr Glass.
While Britain’s economy shrank again in the first quarter of this year, declining 1.5 per cent when England was plunged into its third lockdown, there was a strong recovery in March with GDP growing 2.1 per cent – the fastest monthly growth since August – when restrictions started to ease with the reopening of schools.
The Bank of England expects the UK to record the strongest year of growth since the Second World War in 2021 with a surge in output of 7.25 per cent and the economy returning to its pre-pandemic level by the end of the year.
However, Pablo Shah, managing economist at the Centre for Economics and Business Research, said the March GDP data indicates that the UK’s economic revival was already well under way in March, with strong growth momentum potentially eliminating the gap to pre-pandemic GDP levels by the end of May.
“Fast economic indicators such as card spending data and online vacancy rates point to a rapid resurgence of activity in recent weeks in line with the opening of outdoor hospitality venues and non-essential shops,” Mr Shah said.
The National Health Service's shift back to more regular health activities as the pressure from the pandemic abates will add impetus to the recovery, S&P said, with an extra boost from the country’s testing and tracing efforts and the success of the vaccination drive.
“We saw some of these effects at play already in the final quarter of 2020, when the drag on growth from the health services was greatly reduced as testing and tracing activity picked up considerably,” Mr Glass said.
However, net trade will likely weigh on growth, he said, as the recovery in consumption is set to translate into higher demand for EU imports, on which the UK still heavily depends.
UK goods exports to the EU rose 8.6 per cent in March from a month earlier and are now almost back to their December level, while imports from the bloc remained sluggish with an increase of 4.5 per cent – outstripped by non-EU imports for the first time on record, the ONS said.
“UK exports will continue to struggle to reach levels of the EU because of increased red tape, tariffs in some cases, and weaker demand from the EU, following the implementation of the new trade agreement,” Mr Glass said.
"Still, overall, the UK growth dynamics this year and next will be led predominantly by the recovery from the pandemic. All things going well, despite Brexit, the UK's GDP growth should outpace that of most of its peers," said Mr. Glass.
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Updated: May 12, 2021 03:19 PM