Paul Jackson, Global Head of Asset Allocation Research at Invesco shares his thoughts on the latest data.
The market implications
“We expect that a further gradual release of pent-up demand (indicated by a household savings ratio of 16.1% at end-2020 compared to a 2019 average of 6.5%) will generate better than average growth during the second half of the year. Such gains may be tempered by the ending of the furlough programme on 30 September (4.2 million employees were on Furlough at the end of March) and the anticipation of the higher tax rates that will be needed to balance the budget.
“The UK’s successful vaccination programme allows the possibility of a return towards “normality” for the domestic economy. However, large parts of the global population will remain unvaccinated for some time, which, along with a new wave of infections in many parts of the world (and the prevalence of new Covid variants), suggests the UK may have to maintain some international travel restrictions beyond the end of 2021. Full “normality” is unlikely to be achieved this year.
“We doubt this weak GDP data will change the view of market participants, as they were already looking forward to the subsequent rebound. After strong gains over the last 12 months, in anticipation of economic recovery, the FTSE 100 and other major indices have lost ground over recent days, which we believe may be related to hints of reduced asset purchases from some central banks (including the BOE and the ECB), technology sector weakness (partly on worries about costs and partly due to rising bond yields), concerns about renewed tensions in the Middle East (Israel versus Palestine) and Coronavirus concerns (see the extreme weakness in Taiwan stocks).
“Critical to the future direction of UK stocks, in our opinion, will be the extent of the economic rebound during the rest of 2021, the containment of Middle East tensions, the path of the pandemic in the rest of the world, the durability of the ongoing rise in headline inflation rates and the consequent attitude of major central banks over the coming quarters. We expect the evolving stance of the US Federal Reserve to have the most enduring impact.
The stats
“The UK Office for National Statistics reported that UK GDP declined by 1.5% during the first quarter of 2021 (due to lockdown restrictions), leaving it 6.1% below the year ago level. This is slightly better than the 1.6% quarterly dip expected by the consensus of forecasters (as compiled by Bloomberg). Sterling appreciated slightly upon release of the data and FTSE 100 futures rose a tad.
“The decline in GDP in Q1 followed a gain of 1.3% in 2020 Q4 and was largely explained by greater than expected weakness in private sector expenditure components (consumer spending was down 3.9% during the quarter, while business investment was down a striking 11.9%). Offsetting support came from the 2.6% gain in government spending, while net exports contributed 2.0% to Q1 GDP (though exports were down 7.5%, imports were down an even stronger 13.9%, perhaps due to temporary Brexit related factors).
“Though Q1 GDP was weak, there was a gain in momentum towards the end of the quarter, with an increase of 2.1% in March, after +0.7% in February and -2.5% in January. This promises a strong carry-over into Q2: even if GDP remains at the March level during Q2, there would be growth of 1.6% versus Q1. More likely, we expect the progressive easing of lockdown restrictions to permit further strong gains in retail sales, after +2.2% and +5.4% in February and March, respectively. We believe GDP could increase by at least 4% during Q2, which would imply a gain of more than 20% versus the weak point of 2020 Q2 (note that the British Retail Consortium announced overnight that like-for-like retail sales increased by 39.6% y-o-y in April).”
