News & Analysis

Since November’s GDP report, there has been an overarching theme to growth data in the UK under new restrictions – it keeps exceeding expectations.

With growth contracting 2.9% MoM as the UK entered stricter nationwide lockdown measures in January, a smaller hit to the service sector (-3.5% vs exp -5.5%) and positive growth in construction output (0.9% vs exp -1.0%) meant the data printed a full 2% higher than the median expectation supplied to Bloomberg.

The contraction is comparable with that witnessed in November during the one-month circuit-breaker style lockdown when GDP fell 2.3% MoM, although the base was slightly different, and highlights how the UK economy is now better suited to shifting lockdown conditions.

This time around, however, the closure of schools also weighed on activity. The education sector contracted 16.3% in January, the second largest contributor to the monthly decline. However, this downside contributor is only transitory, with schools now reopening from March 8th.

One notable sub-section of the GDP report was the 0.9% increase in construction output. The increase in output was mostly driven by the 1.7% increase in new work, which offset a small 0.4% contraction in maintenance. Overall, today’s data now see’s the UK economy some 9% below February 2020 levels, after the recovery peaking in October 2020 prior to the second wave impacts. The largest drag on the recovery remains the service sector, whose rebound remains largely subject to the easing of lockdown conditions under PM Johnson’s roadmap.

While the data beat expectations, the depth of the economic contraction continues to weigh on the pound at a time when a resumption in rising US yields places pressure on the risk environment in the G10 space.

Sterling sits 0.35% lower against the dollar this morning, while trading flat against the euro thus far. The data remains concerning and places the emphasis on vaccination progress in order to achieve the government’s reopening timeline. It also highlights how far the UK economy is from a full recovery ahead of next week’s Bank of England meeting, who will have to contend with rising market expectations of policy normalisation..

  • GDP sits 9% below February 2020 levels, after peaking at -4.0% in October 2020.
  • Index of Services is 10.2% below February 2020 levels, after peaking at -4.9% in October.
  • Production and Manufacturing is 5.0% and 5.7% below February 2020 levels respectively after both sat just 1% shy in October.
  • Construction is 2.6% below February 2020 levels after nearly completing a full recovery in October.


Sterling continues decline after January GDP data, but losses against the euro are more contained


Author: Simon Harvey, Senior FX Market Analyst



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