Quarterly economic commentary: January to March 2021

• The UK economy contracted by 1.6% in the first three months of 2021 as public health restrictions were in place for much of the quarter, while more timely figures show the effects of the re-opening of the economy.

• The labour market shows signs of recovery as payrolled employees have increased in recent months, particularly in April and May as lockdown restrictions have been eased.

• The Consumer Prices Index, including owner occupiers’ housing costs (CPIH) annual rate rose to 2.1% in May 2021, in part reflecting the increase in pent-up demand as some industries of the economy have re-opened, while producer price inflation has risen considerably over recent months.

The UK economy contracted by 1.6% in the first three months of 2021, as public health restrictions were in place for much of the quarter in response to the rise in coronavirus (COVID-19) infections and hospital admissions around the turn of the year. The largest contributions to the quarterly decline in output were education, wholesale and retail, and accommodation and food services industries. Recent analysis shows that the UK and global economy have increasingly adapted to these restrictions, such that there has been less of an economic impact than in the earlier stages of the coronavirus pandemic.

Figure 1 captures how selected high-contact industries have been most impacted by the tightening and loosening of restrictions over the pandemic. The latest monthly gross domestic product (GDP)¹ estimates show the effects of the re-opening of the economy on these industries in April 2021, including on non-essential retail and outdoor hospitality, as GDP increased by 2.3% on the month. The latest information on card purchases points to a further increase in expenditure in May, although these have slightly eased in recent weeks. The latest Business Insights and Conditions Survey shows an improvement in the financial performance of trading businesses in late May, compared with normal expectations for this time of year, while the proportion of businesses open for trading has reached its highest level over the course of the pandemic.

Figure 2 shows the level of GDP relative to their pre-pandemic levels, where volume GDP remains below its levels in late 2019 for the G7 economies. These international comparisons capture how the pandemic has evolved in these countries as well as the structural composition of each economy.

International comparisons have also been complicated by how non-market output is recorded by national statistical institutes. Recent forecasts show the global economy to increase by 5.8% this year and 4.4% next year, primarily reflecting the deployment of effective vaccines and the stance of macroeconomic policy. However, the recovery is expected to vary by country while the “risk of last costs from the pandemic also remains high”.

The household saving ratio increased to 19.9% in Quarter 1 (Jan to Mar) 2021 (Figure 3), the second highest on record, as restrictions constrained household consumption, which fell on the quarter, particularly in restaurants and transport. There is uncertainty around how any savings that have been accumulated over the pandemic will be spent this year, as restrictions are lifted. There is evidence that there has been a rise in the proportion of households that are expecting to spend some part of those savings, which might finance pent-up demand, particularly if these additional savings are considered as additional income rather than wealth.

There was a decline of 10.7% in businesses investment in the first quarter, amidst elevated levels of uncertainty. Recent evidence shows that investment is expected to increase over the coming year, although this is conditional on a recovery in demand and revenues. There was a small fall in the holding of currency and deposits by private non-financial corporations in the first quarter. There is some evidence of a further withdrawal of deposits in April, following strong inflows over much of the last year.

Public sector net borrowing (PSNB) was £24.3 billion in May 2021 and £53.4 billion in the financial year-to-May. Borrowing was lower than in the same period last year as the re-opening of the economy led to higher tax receipts, particularly in Value Added Tax, Income Tax and Fuel Duty. There was also lower government spending, particularly in furlough payments.

Notes for: National accounts

1. The latest monthly GDP estimates do not yet reflect the revisions that have been incorporated as part of the latest quarterly national accounts.

The current account deficit narrowed to 2.4% of gross domestic product (GDP) in Quarter 1 (Jan to Mar) 2021. There was a large fall in the volume of goods trade in January, particularly those to and from the European Union, reflecting, in part, the transition to the new trading relationship, before partially recovering in subsequent months. Furthermore, stockpiling is also likely to have taken place in late 2020, in preparation for the UK leaving the single market and customs union. This might explain why the imports of finished manufactured goods have fallen back in the first quarter. Services trade remains subdued, particularly in travel and transport.

In the first quarter of this year, there was a further pickup in gross investment income flows, although these remain below their levels prior to the coronavirus (COVID-19) pandemic. There was a widening in the deficit on investment income, reflecting higher earnings on inward foreign direct investment that were then reinvested.

Table 1 shows that the UK’s net borrowing from the rest of the world in Quarter 1 was primarily financed by increasing external liabilities in debt investment and disinvesting in foreign equity investment assets. There were also large movements in other investment, particularly in the UK acquiring additional external assets.

The labour market shows signs of recovery as lockdown measures have been eased in recent months. Payrolled employees have increased each month since December 2020, particularly in April and May (Figure 4). The largest monthly increase in May was in the accommodation and food service activities industry. The number of furloughed employees fell by 1.3 million between February and April 2021 to 3.4 million, reflecting the partial re-opening of the economy.

Vacancies increased in the three months to May 2021 to 758,000, which was 6.5% lower than the level seen in the period January to March 2020. There was strong recovery in accommodation and food service activities and arts, entertainment and recreation in the latest quarter. The Recruitment and Employment Confederation finds that lower worker availability was frequently linked to lingering pandemic uncertainty and a subsequent reluctance to seek out new roles, fewer EU candidates and furloughed staff amidst some recruitment difficulties.

Regular pay increased by an annual rate of 5.6% in the three-month period February to April 2021, although this in part reflects base and compositional effects. The size of the furloughing effect on wages will reflect how many employees have been on furlough and the extent to which employers have topped up wages, including how this has changed over the last year.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) annual rate rose to 2.1% in May 2021, from 1.6% in April 2021 (Figure 5). The largest drivers of this change were clothing, motor fuels, recreational goods and meals out. This partly reflects the increase in pent-up demand as some industries of the economy have re-opened, including restaurants. This was partially offset by food and non-alcoholic beverages, where prices fell this year but rose a year ago. These base effects reflect unusual price movements at the start of the coronavirus (COVID-19) pandemic, which are now feeding into annual rates a year on.

Producer price inflation has risen considerably over recent months, particularly for crude oil and petroleum products. There have been recent increases in input costs, including freight costs and warehousing costs and higher commodity prices. Recent analysis explains that there might be some erratic price moves as not all sectors experience a return of demand at the same speed, which may cause temporary bottlenecks. This might feed through to consumer prices later this year, as there is some evidence that more of these cost increases are being passed through into selling prices.