Fund Finance Insights

Turning a corner

5 minute read time

With the release of UK GDP data for December, the curtain has been drawn on 2020 (statistically speaking anyway). But the effects of a year that saw the economy contract by a record 10% will live with us for some time yet. At least there are hints in the data that improvement lies not too far away

Shocking figures

Last week’s GDP report had plenty of them: a 10% annual GDP drop (the largest on record); and output still 6.3% below its pre-pandemic peak (roughly equal to the financial crisis). But that masks resilience and business adaptation. GDP grew 1.2% in December, rebounding from November’s lockdown. It meant that the economy grew in Q4, avoiding a double-dip recession. Construction and manufacturing grew at decent pace in the final quarter, while the recovery continued in much of the professional and business services space (in stark contrast to the consumer-facing bits). There’s a big repair job on, but there are signs it can be achieved. 

Tight belts

An outsized drop in household spending lies behind much of the UK’s economic malaise. Government expenditure and business investment both continued to climb in Q4 2020, with the former now above pre-pandemic levels.  But as the second wave struck, households trimmed their outgoings, leaving consumption spending 8.4% lower than a year before. Lockdowns and tiered regional restrictions meant spending in restaurants and hotels fell by a fifth. Still, the flipside of our abstemious behaviour is that (some) households have accumulated substantial extra savings that could power the recovery when it comes.

Slowly, slowly

The temperature may be bitter, but the latest economic indicators have a faint hint of sweetness. Card spending rose 8% in the week to 4 February, helped by the month-end pay day and, perhaps, the cold snap – cupboard stocking as spending on staples was 13% higher than a year before. The share of business trading rose a touch (three percentage points), as did online job ads (two percentage points). And you’ve probably noticed, but traffic was slightly busier, too. Add to that the 14.5m people having the first jab and infection rates the lowest since last autumn/early winter. Slowly, it’s coming.


Consumer spending graph

Consumer spending January 2020 - February 2021


All 12 UK regions started 2021 with the sharpest deterioration in business activity since May last year. Lockdown restrictions were the culprit both then and now. All regions also posted declines in orders and employment. Scotland recorded the sharpest decline in business activity, while London gave the weakest overall reading. One area where growth is picking up significantly is costs and prices. Most UK regions saw steep increases in input costs in January, with Northern Ireland (Brexit red tape) leading the way. Prices of goods and services are pushing higher in all regions bar one: London.

Dry December

Even though December is typically a strong month for UK trade, the total trade deficit widened by £0.3bn to £5.6bn. Companies were encouraged to stockpile medical supplies, machinery and transport equipment as a key part of contingency plans in preparation for Brexit, leading to an increase in imports by about £1bn. Exports, however, grew by just half that. Reports from the early part of the year paint a picture of disruption from adjusting to new trading arrangements between the UK and the EU. How that unfolds will go a long way towards determining the future path of the UK’s trading position.

(Non) equivalence

Financial services contribute around 7% to UK GDP (compare this with 0.02% for fishing). Despite that, the UK and EU are still negotiating the terms of post-Brexit access for City institutions to European financial markets. The EU insists the UK must outline its plans for future regulations before it can consider granting “equivalence” status (allowing the UK to trade more freely in Europe’s financial services market). Bank of England governor Andrew Bailey insisted that “a world in which the EU dictates and determines which rules and standards we have in the UK isn't going to work”. Neither side seems to be prepared to compromise for now.

Up and up

The US federal budget deficit soared by $163bn last month, taking the total deficit to $736bn for the current financial year. To put those numbers in context, it’s more than twice the deficit compared to the same time last year. The surge is mostly attributable to the coronavirus relief package approved by Congress in December 2020, to fill the gap left by the fading stimulus of earlier rounds. And there’s yet more to come. The deficit is likely to widen further as President Joe Biden’s American Rescue Plan, worth $1.9trn, is swiftly moving toward approval. Most notably, it includes a third stimulus check for up to $1,400 and an extension to federal unemployment aid. 


Inflation has customarily sat in the upper echelons of economic data. The past decade has seen it drift down the rankings, but it’s starting to stir. Attention is increasingly focused on it as large fiscal stimulus packages fuel concerns of high inflation (an outcome financial markets are starting to consider) against a backdrop of pandemic-inspired output gaps and weak labour markets pulling in the other direction. For now, core US prices are treading a path between the two, with the index unchanged for two months in a row, making for a reading 1.4% higher compared to last year. That balancing act might be hard to maintain.

By Sebastian Burnside

Chief Economist, NatWest Group Economics