The UK economy shrank by 1.5 per cent in the first three months of 2021 in the wake of the country’s extended winter lockdown, according to the Office for National Statistics (ONS).
However, this was a smaller decline than the initial impact of the Covid-19 outbreak in Q1 2020, which saw UK GDP fall by 6.1 per cent.
Overall, the UK economy is now 8.7 per cent smaller than it was prior to the Covid-19 pandemic.
The Q1 slump was somewhat expected due to the winter lockdown causing schools, retail and consumer facing industries to close.
There was however some resilience in March, which saw GDP growth of 2.1 per cent. This is the fastest monthly growth rate since last August, a positive shift in line with the easing lockdown restrictions.
AJ Bell financial analyst Danni Hewson said that the latest GDP figures demonstrated the “resilience of the British public”.
“Despite the reopening of schools, the lockdown for many sectors was still very much in place and yet the economy was blossoming. Buoyed by the vaccine rollout houses were being built, cars and motorcycles repaired, and goods being produced in Covid-secure facilities,” she said.
“Recovery with a capital R and this growth has particular significance because it shows how the economy can function if future lockdowns arise.
“That’s further evidenced by the extent of the first quarter contraction, 1.5 per cent is significantly lower than the 4 per cent that had been predicted. There is still a lot of ground to be made up, but March’s figures suggest a quick recovery is within reach.”
Looking at the data for March specifically, GAM Investments investment director Charles Hepworth said this indicates the UK economy might now be headed in.
He said: “This shows the more important rate of change at the back end of the first quarter which is giving direction to where the UK economy might be now – powering back into a strong recovery and getting the justified reward for fast vaccine distribution.
“A faster recovery changes the dynamic of central bank rate decisions and gilt yields are seeing a drift higher this morning as the prospect of negative rates is further removed from their outlook.”
Investors looking ahead should be focusing on the eventual recovery, according to Derrick Dunne, chief executive of Beaufort Investment.
He said: “GDP slumped by 1.5 per cent in the first quarter, which is no huge surprise with the country spending most of the period locked down, leaving the UK economy 8.7 per cent lower than its pre-Covid level.
“Government expenditure is also being used to prop up the economy, with household consumption and business investment declining amid coronavirus.
“None of this makes for enjoyable reading, but we have to take comfort in how much brighter things look when compared with the start of the year. GDP is estimated to have rebounded in March, rising by 2.1 per cent, the fastest monthly growth since August 2020. Shops are also opening, beer gardens are buzzing and many companies are cautiously bringing staff back to work.
“There will almost certainly be some bumps in the road ahead but, more than ever, it’s important for investors to focus on the eventual recovery and keep that level-head they should be well-accustomed to by now.”
But it’s important for investors to bear in mind that this data is backwards looking, according to Rachel Winter, associate investment director at Killik & Co, and should factor this into their investment outlook.
“We hope that the figures for the second quarter will illustrate the reopening of the economy that began at the end of the first quarter. The Bank of England has predicted an economic expansion of 7.5 per cent for the full year 2021.
“This morning’s GDP was not all negative, and it was pleasing to see growth in construction due to the high levels of activity in the housing market and the recommencement of large building projects. This has been reflected in strong share price performances from the housebuilding and materials sectors.”