UK faces negative growth for 3rd time - what does this mean for the UK?

The UK economy has seen negative growth of -1.5% in its most recent quarter of 2021 (Q1, January-March). This has been as a result of the winter lockdown, which after Christmas saw cases rise and the R number above 1 too. This meant once more businesses shut, consumer confidence plummeted and the economy began to contract. Trading economics illustrates the fall in economic growth below:

Although we have currently entered a contractionary phase, from the graph you will notice the UK economy has stabilised, we went from 16.9% growth to 1.3% to -1.5%, this is a lot more stable than the -19.5% to 16.8% figures witnessed after the first lockdown. This is a benefactor for the UK economy as it has narrowed down the trade cycle. This effectively means that as there was a bust period in Q2 of 2020, the UK had to steeply recover in the next quarter thereafter, thus triggering unsustainable economic growth. Conversely, this recent stable and sustainable economic growth give the UK economy benefits such as allowing businesses and consumers to plan ahead. This involves booking holidays or planning investment, dependent on the economic agent, and also boosts confidence in the long term. This means the UK economy may likely expand in the coming quarters of 2021 as business confidence rises as the UK economic growth stabilises, additionally, consumers will be more willing to spend more due to vaccine rollout which has given a further boost in confidence throughout the population.

On the other hand, to not overheat the UK economy and to prevent another large spike in growth, the BoE may look towards imposing contractionary monetary policy in the near future. Also known as tight monetary policy, the monetary policy committee can in fact reduce the money supply or raise interest rates, in order to find a balance where the economy is not too overwhelmed by sudden increases in demand. Therefore as a result a key message here is to not be too concerned with current figures, as the UK coinciding with the vaccine rollout will inevitably turn the tide of the international downturn and revive the UK economy in the coming quarters.

An example of this being, the UK saw a GDP growth of 2.1% in March, its fastest monthly growth since last August. This is a direct result of an increase in retail spending as eager consumers splash their lockdown savings. As the UK has now undergone 3 major lockdowns, consumers have not been able to spend and so have saved up their money, coinciding with a lack of confidence. This, therefore, means as the world re-opens, and as well as the vaccine rollout so far being a triumph despite Astra-Zeneca vaccine shortages, confidence has risen once more, with people booking holidays and spending money ready to re-enter normal living’.

Tej Parikh, chief economist at the Institute of Directors told the BBC, "The first quarter should mark the low point for the economy in 2021," he said. "The lockdown, and added costs of navigating new trading terms with the EU, limited many businesses' trading activities at the start of the year." This, therefore, shows how this has also brushed under the devastating impacts Brexit has also had on our economy. Upon leaving on 1st January 2021, this meant new quotas and tariffs were to be adhered to, as well as various regulations to abide by. This means that as businesses had to file documentation and papers in order to trade, this stunning importation and exportation, therefore inevitably slowing and also contracting economic growth.

The U.K economy is still 8.7% smaller than where it was before the pandemic. This is also a prevalent issue as there are huge steps to go before we can begin to develop once again. Chancellor Rishi Sunak told the BBC the economy was "getting back on track." However, Brexit has put many doubts on this, with strayed trading with the EU.

"Imports from Europe remained sluggish in the first three months of the year, being outstripped by non-EU imports for the first time on record," said Darren Morgan for the ONS. The ONS additionally said the total trade deficit, excluding precious metals, narrowed by £8.4bn to £1.4bn. This is monumental as trade has slackened, and the UK owning a natural deficit in its current account, this means as our main import is oil, this has therefore decreased as a result of leaving the EU; but this does not mean we have exported more goods/services and so many be losing out on potential economic growth.

However, the decreased imports and exports between the UK and EU may not be as a result of Brexit but due to the COVID-19 Pandemic as the UK cannot export tourism to European nations. This is one of the UK’s main exports with London being a major attraction in Britain with various landmarks present. Suren Thiru, head of economics at the British Chambers of Commerce, said the decline in economic output in the first quarter largely reflected the squeeze on activity from coronavirus restrictions, which was partly offset by growing business resilience to those restrictions and a monthly boost from the reopening of schools in March.  (Direct BBC Quote). This means that despite businesses now being re-open, the vast spell of closure where foreign trading and investment halted, meant economic agents ceased to interact. As a result, businesses made less revenue, creating less corporation tax and business tax revenue for the government which also led to negative economic growth.

Overall, the UK’s contractionary phase that has been recorded and published may fear many people that we are in fact not on the right course; however, in the long term, economic growth is nearing closer to the government's long term objectives, for growth to be sustainable and stable. Therefore with recent boosts in March to the economy, the UK is in fact on the right track to success and also with the vaccine rollout will consequently allow the UK to soon be on the way to full rehabilitation and long term progression.


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Written by Euan Taylor


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