UK GDP rebounds in February despite lockdown restrictions

• UK gross domestic product (GDP) rebounds in February despite ongoing national lockdown restrictions
• The reopening of the UK economy has boosted hopes of a robust recovery
• UK exports make a tentative recovery following January’s slump
• Pound Sterling (GBP) unchanged as growth data misses estimates

According to the Office for National Statistics (ONS), the UK economy returned to growth in February despite ongoing COVID-19 lockdown restrictions.

The economic recovery was driven by rebounding business activity as firms adapted their operations to the COVID-19 crisis and increased consumer spending as the UK government began easing lockdown restrictions.

While UK gross domestic product (GDP) missed estimates by a margin, the economy’s latest snapshot suggests that a robust rebound is on the cards in the second half of 2021.

UK GDP jumps higher by 0.4% month-on-month in February

According to figures published by the Office for National Statistics (ONS), UK GDP climbed 0.4% higher in February, following a revised slump of 2.2% in January.

Despite strict lockdown restrictions and ongoing uncertainty over mutant variations of COVID-19, UK economic recovery gained pace in February, driven by activity in the manufacturing and construction sectors.

British retailers have also reported an uptick in sales, albeit the retail and hospitality industries remain relatively constrained by pandemic restrictions.

Compared to the manufacturing and construction sectors, which grew by 1.3% and 1.6%, respectively, Britain’s services sector recovered by 0.2% month-on-month.

While data signals the early stages of a recovery, the UK economy remains 7.8% smaller than its pre-pandemic size and 3.1% below the initial recovery peak achieved last October.

Nonetheless, economists are hopeful that economic activity will continue to improve as lockdown restrictions are relaxed and areas of the economy that have been shut down begin to reopen.

Economists forecast solid UK growth for Q2 and beyond

According to analysis from Britain’s longest-established think tank, the National Institute of Economic and Social Research (NIESR), February’s data indicates that the UK economy underwent a smaller-than-expected economic contraction in Q1.

NIESR forecasts UK GDP rising sharply in Q2 as the reopening of shops, gyms, bars and restaurants with outdoor seating areas will fuel a significant rise in consumer spending.

The economic think tank expects output to increase by 1.8% in March, followed by a 2.2% expansion in April – driven by the reopening of non-essential stores and partial reopening of hospitality venues.

Overall, NIESR expects UK GDP for Q2 to rebound by 4.6% as a wave of pent-up demand is unleashed following months of national lockdown restrictions.

While risks remain as Europe’s third COVID wave threatens to spread to Britain, the country’s progressive coronavirus vaccination programme has ensured that hopes for a strong recovery remain elevated.

The head of economics at the British Chambers of Commerce (BCC), Suren Thiru, stated that “the combined vaccine rollout and relaxation of COVID-19 restriction should foster the release of further pent-up demand.”

However, Mr Thiru noted that “hopes of a sustained consumer-led revival may prove too optimistic as the economic scarring caused by the pandemic may trigger a renewed reluctance to spend as the Treasury withdraws stimulus.”

Meanwhile, separate data published by the ONS has revealed that UK exports and imports staged a partial recovery in February following January’s slump caused by Brexit uncertainty.

According to the ONS, UK exports to the EU jumped up by 46.6% month-on-month in February, equivalent to GBP 3.7BN as British firms adapted to new trade rules and fears over Brexit disruption faded.

UK exports to Europe recover in February

The ONS revealed that British goods exported to the bloc rose by around 50% in February, following a 42% slump in January, equivalent to a loss of GBP 5.7BN.

Machinery and transport equipment and chemicals, particularly cars and medicinal and pharmaceutical products, were shown to have driven the rise in exports.

Exports of food and live animals also increased by GBP 300m, or 77%, after a month of significant disruption for the fishing community.

Still, while February’s figures show a reversal of January’s slump, goods sales to the bloc remain significantly lower than levels seen last year.

The ONS and business analysts have attributed the decline in trade flows to stockpiling ahead of the Brexit transition period. However, given that exports are approximately 11% below levels a year earlier, it’s evident that many businesses are still struggling with border friction due to the new regulations.

The Road Haulage Association (RHA) has also contested stockpiling arguments and called for “urgent intervention” to help firms adjust to new administration challenges.

The RHA went on to say that hauliers are avoiding taking jobs due to border disruption and that nearly 75% of returning trucks arrived empty in February.

While Tuesday’s data support the UK’s recovery outlook, as February GDP data missed consensus estimates and barriers to trade continue to weigh on British exports, today’s publication has done little to boost pound Sterling (GBP) exchange rates.

British pound sidelined after UK GDP data misses estimates

Despite hopes that the reopening of non-essential shops, pubs with outdoor space, gyms and hair salons will fuel a solid economic recovery in Britain, the British pound (GBP) spot trades almost unchanged on the day.

After opening at USD 1.3754, the British pound to US dollar (GBP/USD) exchange rate is trading flat at USD 1.3741, while the British pound to euro (GBP/EUR) currency pair at EUR 1.1512 is trading 0.2% lower.

GBP/EUR and GBP/USD failed to benefit from Tuesday’s GDP publication, which revealed that the UK economy expanded by 0.4% in February. While the data boosted optimism towards Britain’s recovery outlook, as the monthly release fell short of consensus expectations for 0.6% growth, GBP had a lacklustre response.

Stronger-than-expected construction and manufacturing data had little impact on pound Sterling (GBP) exchange rates, and two of the UK’s leading banks, HSBC and NatWest, warn that GBP could struggle to rediscover its bullish form against USD and EUR.

The British pound’s (GBP) recent advances have been primarily driven by the UK’s rapid vaccine rollout. However, as other countries vaccination programmes begin to accelerate, vaccine-fuelled gains are expected to become short-lived.

With the vaccination narrative becoming stale, GBP will need fresh drivers to drive momentum, and it seems that the outlook for GBP/EUR and GBP/USD this quarter will depend on the UK’s path out of national lockdown.

While NatWest said that pound Sterling (GBP) has the potential to make a bullish advance over the coming weeks, GBP upside could stall in the second half of the year as investors refocus on longer-term productivity and competitiveness.

NatWest’s Head of FX Strategy, Paul Robson, warns that “GBP recovery could run out of steam later into the year as it becomes more apparent that Brexit is weighing on trend growth.”

Mr Robson added: “Softer productivity trends, deep economic scarring and a deteriorating sustainable current account deficit position are expected to impact negatively.”