What December’s GDP Report Shows About 2021

If you even peeked at financial news last Friday, you likely saw the news that UK gross domestic product (GDP, a government-produced measure of economic output) just suffered its largest annual fall since 1709’s Great Frost wiped out the harvest. Indeed, 2020 is one for the history books—and not in a good way. But in our view, a look at December’s data and the UK’s economic composition shows why the future should be bright once businesses can reopen fully.

For full-year 2020, GDP fell -9.9%, amongst the worst declines major developed-world economies have reported thus far.^[i] Yet in our view, this isn’t because Britain’s economy is inherently weaker than its peers—rather, it is because services industries make up a relatively larger portion of GDP. The Office for National Statistics (ONS) estimates services contributes about 80% of GDP annually.^[ii] The World Bank, which uses different criteria, places services at 71.3% of UK GDP—more than the eurozone, where the World Bank estimates gets only 66.5% of its output from services.^[iii] Pubs, cafes, restaurants and personal services took much longer than factories to reopen after 2020’s first lockdown. They were also forced offline again (except for takeaway business) during the autumn and winter lockdowns, whilst factories were mostly able to remain open. As a result, the UK’s largest economic segment took the biggest hit. Countries with similar policies endured milder GDP declines largely because their economies are relatively less services-intensive.

To see this another way, consider that household spending on leisure activities—which includes restaurants, pubs, cafes and other items you might classify as spending on social activities—accounts for more than 20% of UK household spending, versus roughly 15% for the world’s other major economies (as represented by members of the G7).^[iv] Hence, UK output is likely especially vulnerable to the forced closure of these businesses.

Yet in our view, Q4 and December GDP results show activity can recover quickly when these businesses are allowed to reopen. Not only did GDP manage to grow 1.0% q/q in Q4 despite the new lockdowns taking effect in November, but the temporary easing of restrictions over the holiday season helped December’s GDP grow 1.2% m/m.^[v] Output in the services sector did the heavy lifting. Services output rose 1.7% in the month and, according to the ONS’s calculations, generated the vast majority of total GDP growth.^[vi] This happened as lockdowns eased partially over the holiday season, enabling some services establishments to resume business at a limited capacity. It wasn’t enough to fully erase services’ -3.1% m/m decline as lockdowns tightened in November, but we found it encouraging.^[vii] If a partial, albeit temporary, reopening could boost the data that much, we think it bodes well for the impact a full reopening can eventually have.

In our view, this is the eventuality equity markets have been looking to, and we think that explains their continued rise throughout the autumn and winter lockdowns.^[viii] Our research shows markets are efficient and forward-looking. We think they demonstrated this last year, as equities plunged in February and March before economic data confirmed the lockdown’s impact—and began recovering in mid-March, well before economic data registered improvement.^[ix] We think equity markets are likely behaving similarly now, anticipating the economic future—not just for Q1 or Q2, but for the next year or so. Markets are well aware of vaccines’ rollout and the government’s timeframe for reopening, which we think should help them continue seeing through any potential near-term negative economic readings before this lockdown ends.