UK economic data confound forecasters and beat expectations

The latest UK economic data has been significantly better than economists expected, suggesting households and companies have been more resilient to the latest lockdown and Britain will climb international economic performance league tables in the months ahead.

Most of the important economic data for the period of the lockdown that began on January 4, including output, employment, business sentiment and public finances, have been better than forecast and much stronger than in the first lockdown, showing the ability of businesses and consumers to adapt.

With the UK economy poised to reopen gradually in the weeks ahead amid a successful coronavirus vaccination rollout, unlike much of the EU, the prospects for the immediate economic recovery are strong.

The positive surprises also lower the immediate pressure on policymakers to provide further monetary or fiscal boosts.

GDP forecasts are revised up

For weeks, economists have had to adjust to better-than-expected data and are rushing to revise up their forecasts for economic performance in the first quarter.

This is not limited to the private sector. In its February monetary policy report, the Bank of England said the UK economy would shrink by 4.2 per cent in the first quarter compared with the previous three months. But on Friday, Michael Saunders, an external member of the BoE’s monetary policy committee, said that “data so far suggest that first-quarter gross domestic product will be less weak than expected in the February monetary policy report”.

Outside the BoE, economists are much less gloomy, thinking the contraction will be 1 to 2.5 percentage points less deep in this quarter. Barclays, Oxford Economics and ING expect the economy to shrink between 2 to 2.5 per cent, while Pantheon Macroeconomics, HSBC, and the EY Item Club forecast a fall of less than 1.9 per cent.

Column chart of Citigroup CESI index, positive= above expectations showing The UK economic surprise index signals better than expected data

Citigroup seeks to measure the degree to which economists are surprised by the published economic data. In its economic surprise index, which compares the data with economists’ expectations, UK forecasters have consistently been too pessimistic since the summer of last year.

Over the past two weeks, there has been no let-up in the positive surprises, with better-than-expected purchasing managers’ indices, business surveys and official data pointing to a strong uptick in activity in March.

In February, the unemployment rate unexpectedly fell and joblessness is now much lower than economists forecast it would be only a few months ago.

Line chart of %, by date of forecast showing Economists are revising down their UK unemployment forecast

The public finances deteriorated less than forecast with tax revenues showing unforeseen resilience and only a week after its Budget forecasts, the Office for Budget Responsibility, the independent fiscal watchdog, was forced to admit that borrowing in 2020-21 “looks set to undershoot our latest estimate”.

Despite a new lockdown, UK GDP fell only 2.9 per cent in January compared with the previous month, a much milder drop than the 4.9 per cent fall forecast by economists polled by Reuters. The first coronavirus lockdown resulted in an 18 per cent plunge in output in April.

Column chart of % change compared with the previous month showing UK economic forecast have proved pessimistic

Mortgage approvals unexpectedly remained close to a decade high in January and retail sales growth excluding fuel disappointed in January but exceeded forecasts in February.

A notable exception to the string of positive surprises was the assessment of the impact of the end of the Brexit transition period on the economy. Economists underestimated both the large fall in exports and the contraction in the export-led manufacturing output in January.

Businesses and consumers adapt to restrictions

The mismatch between expectations and actual data is partially due to the difficulties in forecasting during the Covid-19 crisis. Economists say anticipating how consumers and businesses have adapted to Covid-19 restrictions has proved to be particularly challenging.

Andrew Goodwin, chief UK economist at Oxford Economics, said “the longer consumers and firms have experienced lockdown conditions, the better they have adapted and found ways to keep activity closer to normal levels”.

In January, sectors facing tough restrictions — including hospitality, retail, and arts and entertainment — all performed much better than last April thanks to wider use of online sales, home deliveries and online streaming services.

While accepting they had been persistently too pessimistic, economists defended their forecasting record. Sandra Horsfield, economist at the financial services company Investec said anticipating how much better businesses had adapted was “very difficult, leaving plenty of scope for surprises”.

Bar chart of % change compared with February 2020 showing UK output has recovered from April's low

Many countries have proved more resilient than anticipated, although this has been a bigger feature in the UK than elsewhere.

Spanish output stagnated in the final quarter of 2020, defying expectations of a contraction, and the French economy shrank much less than forecast. Both German and US economic growth were revised up more than expected.

The forecasting errors of recent months also suggest that the economic recovery from the pandemic will be faster than thought, brightening the outlook, especially with the increased government support announced in the March Budget.

The OBR forecast earlier in the month that the UK economy would regain its pre-pandemic size in the third quarter of 2022, six months earlier than it forecast in November. Many analysts see that as too pessimistic.

But in the short term, the rebound might be a little weaker because of the stronger first-quarter figures. “We’ve actually revised down our expectations for quarter-on-quarter growth in the second quarter to 6 per cent because the stronger first quarter means there is less ground to make up,” said Goodwin.


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