Quarterly National Accounts (Q4) - Capital Economics
UK Economics

Quarterly National Accounts (Q4)

UK Data Response
Written by Ruth Gregory

The confirmation that the economy stagnated in Q4 shows that it was very weak even before the spread of the coronavirus in the UK. We expect a 15% q/q fall in GDP in Q2 and things could easily be worse.

Economy stagnating even before the coronavirus

  • The confirmation that the economy stagnated in Q4 shows that it was very weak even before the spread of the coronavirus in the UK. We expect a 15% q/q fall in GDP in Q2 and things could easily be worse.
  • Q4’s 0.0% q/q rate of GDP growth was left unrevised as expected, leaving the annual rate at just 1.1%, its lowest since Q1 2018. The only real “strength” came from government spending, which added 0.3ppts to growth possibly due to planning ahead of Brexit (remember that?). Household spending didn’t grow at all and business investment dropped by 0.5% q/q. At least the 2.4% y/y rise in profits in the year to Q4 suggests that firms were reasonably healthy going into the crisis. But households’ balance sheets look more fragile – the household saving ratio of 6.2% in Q4 is still a long way below its average since 1997 of around 8%.
  • And this was before the spread of the virus forced firms to tighten their belts and wide swathes of discretionary household spending to dry up. Admittedly, the government’s fiscal package, which allows workers to receive 80% of their salaries up to £2,500 a month, will probably help to limit the rise in unemployment and reduce the drag on consumption. But we doubt it will prevent consumption from plummeting in Q2. We expect an eye-watering fall in retail sales in the region of 30% m/m in April. The slump in domestic demand and business confidence and surge in borrowing costs, suggests that investment will be hit hard too.
  • Meanwhile, the current account deficit looked a little less ominous heading into the coronavirus crisis. It fell to £5.6bn (1.0% of GDP) in Q4, its lowest since Q2 2011, from £19.9bn (3.6%) in Q3. But most of this reflected a temporary jump in non-monetary gold exports. So the underlying deficit was still around 3% of GDP, which partly explains why the pound has been hit so hard in recent weeks. (See here.)
  • Overall, we think the coronavirus will deliver a hit to economic activity well in excess of the 6% fall in the financial crisis and the 8% drop in the Great Depression. (See Chart 1.) And while we assume that GDP will recover fairly quickly in the second half of 2020, it may be a few years before the economy reaches the level it would have done had the coronavirus shock not happened.

Chart 1: GDP (100 = Pre-Recession Peak)

Sources: Refinitiv, ONS, Capital Economics

Table 1: GDP by Expenditure (Components of GDP, % q/q Unless Stated)

Household Spending

Government Spending

Fix. Capital Formation

Stockbuilding(Cont. to Growth1)

Domestic Demand

Imports

Exports

GDP

GDP (%y/y)

Q1 19

0.1

1.1

1.0

1.1

3.5

9.3

1.8

0.7

2.0

Q2 19

0.5

1.1

-0.5

-1.2

-2.7

-10.7

-3.5

-0.2

1.3

Q3 19

0.2

0.0

0.5

-1.0

-0.9

2.3

7.0

0.5

1.3

Q4 19

0.0

1.5

-1.2

0.5

-1.5

0.4

5.0

0.0

1.1

Sources: Refinitiv, Capital Economics, 1Excluding alignment adjustment


Ruth Gregory, Senior UK Economist, +44 7747 466 451, ruth.gregory@capitaleconomics.com