Market Briefing (no.35) 24th May 2021
Traffic lights – With lockdown being eased across all four nations of the UK, the Westminster government produced its traffic light system for England in permitting limited international travel. With the devolved nations enabling similar guidance, foreign holidays are back on the agenda for ‘green list’ countries.
The so-called Indian variant of Covid has also hit UK shores with some increases in transmission in parts of London and certain north-west English towns and cities. Focused surge testing has been deployed to these areas in an attempt to curb the effects.
All of this, on the backdrop of a threat that inflation may be starting to increase.
Although the famous quote says that “there are three types of lies – lies, damn lies and statistics”, in view of this continued uncertainty, how has the UK economy reacted? To answer this, let’s review the numbers provided by the Office for National Statistics (ONS) in their evaluation of UK – and global – gross domestic product (GDP)(1).
Watching UK GDP
As the graph shows, UK GDP has contracted. The amount is yet to be finalised but is estimated to be down 1.5% in Quarter 1 (January to March) 2021.
The level of real(2) (inflation adjusted) GDP in the UK is now 8.7% below where it was, prior to the pandemic, at the end of 2019. Compared with the same quarter a year ago, when the initial economic impacts of the coronavirus (COVID-19) pandemic began to Source: ONS (3) show, the UK economy fell by 6.1%(3).
Different sectors of the economy
As can be seen by the graph to the right, the Services and Production sectors saw output contract in Quarter 1 2021.
These sectors saw output decrease and are now below Quarter 4 2019 levels – the last full quarter before the pandemic hit(3).
The Construction sector, however, saw output increase.
As shown below, the largest contributor to the fall in the Service sector was from education.
The fall in output from education was in large part caused by the low school attendance due to Covid induced school closures.
Accommodation and food services, reflecting the impact of the Covid restrictions that forced the closure of nonessential businesses like hotels and restaurants, also fell.
These restrictions also impacted the wholesale and retail trade sector, including a significant fall in the need for personal services, such as hairdressers.
On the ‘other side of the coin’, human health and professional, scientific, and technical services showed growth as the research, development and delivery of the Covid vaccine continued apace.
The Production sector saw output decrease.
In comparison with levels before Covid hit, output is now lower than pre-Covid times.
The major contributor to this reduction in the production sector was transport equipment.
As workers continue to work from home, reducing the demand for commuting, the need for the maintenance and replacement of train rolling stock and planes for example, declined.
Similar to the Services sector, the research, development and delivery of the Covid vaccine continued to drive growth as pharmaceutical products and preparation saw good growth within the Production sector.
The Construction sector saw output increase. However, in comparison with Quarter 4 2019 – the last full quarter before the pandemic – output remains down. The ONS suggests that this increase was “mainly because of a 5.8% increase in March 2021, which was especially noticeable in private housing (both new work and repair and maintenance) and private commercial new work.”
They continued to say that “anecdotal evidence received from survey returns for March 2021 suggested increased new work, delayed projects returning to sites, and a general increase in demand and confidence across the industry, as well as unusually warm weather, were contributing factors to the large monthly increase in construction output(3).”
In context with other countries
When compared with other European economies, only Spain sits below the UK in output for Quarter 1 for both real GDP(2) and nominal GDP(4).
France was also below the UK in terms of nominal GDP(4).
US real GDP(2) has almost recovered to its pre-pandemic levels with nominal GDP(4) showing a positive return.
According to the ONS(3), the main points are:
- UK GDP estimated to have decreased by 1.5% in Quarter 1 2021.
- In output terms, school closures and a large fall in retail sales earlier in the quarter dragged down GDP growth.
- Contractions in services and production output were seen, but construction output grew.
- Level of GDP is 8.7% below where it was before the pandemic at Quarter 4 2019.
As the graph below shows, US and in particular UK markets have had a positive start to 2021, despite the news updates mentioned above. (These are all in sterling £ terms.)
Source: FE Fundinfo(5)
What should this tell you?
Irrespective of broader news, even headlines that discuss important economic matters such as UK and global GDP, and remembering that “past performance is no guide to future returns”, from an investment perspective, investors should have a balanced, longer term view.
As we have said before, we will continue to monitor the current financial situation and keep you notified of any changes that are made. If you would like to discuss how the current situation might affect you, then please seek professional financial advice to discuss your financial situation further.
This week in history …
- 21st May 1916 Clocks and watches in Britain went forward one hour as the Daylight Saving Act (Summer Time) was introduced.
- 22nd May 1859 Arthur Conan Doyle, the creator of Sherlock Holmes, was born to Irish parents in Edinburgh, Scotland.
- 23rd May 1998 The Good Friday Agreement is accepted in a referendum in Northern Ireland with 75% voting yes.(6)
- 24th May 1686 Gabriel Daniel Fahrenheit, German physicist who invented the mercury thermometer, was born.
- 25th May 1961 President John F Kennedy announces US goal of putting a man on the Moon before the end of the 1960s.(6)
- 26th May 1896 Dow Jones index begins with an average of 12 industrial stocks closing at 40.94 points.(6)
- 27th May 1940 Known as Operation Dynamo, British and Allied forces begin the evacuation of Dunkirk.(6)
- 28th May 1937 Neville Chamberlain becomes Prime Minister of the United Kingdom.(6)
Sources & definitions
- Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period. GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate – https://www.investopedia.com/terms/g/gdp.asp
- Real gross domestic product (Real GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year – https://www.investopedia.com/terms/r/realgdp.asp
- Nominal gross domestic product is gross domestic product (GDP) evaluated at current market prices. GDP is the monetary value of all the goods and services produced in a country. Nominal differs from real GDP in that it includes changes in prices due to inflation, which reflects the rate of price increases in an economy – https://www.investopedia.com/terms/n/nominalgdp.asp
- FE Fundinfo
Issue 36 of the market briefing will be published on 14th June 2021.
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