We are upgrading our forecast for UK economic growth in 2021 from 4.5% to 6.0%.
First, the government has started lifting its stringent winter restrictions - allowing the economy to steadily re-open over the next few weeks - with most limits on activity set to end in June if the pandemic keeps receding in the UK. Sentiment has already rebounded sharply. The chart shows the purchasing manager index (PMI) jumped from 40.6 in January to 56.6 in March.
Source: Bank of Singapore, Bloomberg
Second, economic activity has been more resilient in Q1’21 despite the severity of the UK’s winter lockdown. February’s data revealed a 0.4%MoM rebound in GDP after the economy had contracted by -2.2%MoM in January.
Source: Bank of Singapore, Bloomberg
We still expect the UK economy will have shrunk over Q1’21 as a whole but the downturn will be modest compared to the slump that occurred at the start of the pandemic last year.
Third, the labour market is also proving more resilient. February’s unemployment rate surprisingly dipped from 5.0% to 4.9% as the chart above shows. Currently, 4.9 million employees or 14% of the total UK labour force depend on the government’s jobs retention scheme. But as the economy re-opens the number of roles needing government support will decline, ensuring the likely rise in unemployment when the scheme ends in September will be tempered.
Last, the economic recovery is pushing inflation up again. March’s consumer price index (CPI) rose from 0.4%YoY to 0.7%YoY as clothing costs rebounded after falling during the winter lockdown. Inflation appears set to return to the Bank of England’s (BoE) 2% target in Q3’21.
The faster recovery supports our overweight stance on UK equities and our forecast for the GBP to strengthen to 1.44 against the USD. In addition, rising inflation is likely to make the BoE be the first major central bank to taper and end its quantitative easing this year. The BoE may not raise its Bank Rate from 0.10% in 2022 as inflation could dip back below its 2% target next year as supply chain disruptions fade and wage growth stays modest. But tapering its bond buying will steepen UK yields to the benefit of the GBP.
