GDP Q3: The Economy Strikes Back

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A strong rebound in the economy is clearly positive, but we should keep the champagne on ice for now. The summer boom was turbo-charged by the Eat Out to Help Out scheme, while the furlough scheme worked its magic by keeping unemployment under wraps. But if you shut down an economy and then open it up, it’s not hugely surprising that you get a huge seesaw effect in quarterly GDP numbers

A swollen summer of economic activity hasn’t repaired the damage done in the first half of year though and the new lockdown means the UK can expect to end 2020 significantly behind where it started. The Bank of England estimates an 11% contraction in the economy over the course of the year.

The real litmus test for the economy going forward is how soon it can return to pre-pandemic levels. News of a potential vaccine makes the climb back look a lot less daunting, not only because it offers the prospect of a brighter future, but also because it gives businesses and individuals greater confidence in the here and now. Businesses can see a glimmer of light at the end of the tunnel, rather than an interminable struggle to stay afloat until we return to some semblance of the old normal at some unknown point in the future.

Markets have already responded to Pfizer’s coronavirus breakthrough by pricing in better times ahead, but the economy is a more sluggish beast, and it will take time to build up a head of steam.

Things also look like they will get worse before they get better, with rising unemployment on the cards over the course of the winter. January is a prime month for insolvencies, as troubled businesses throw in the towel after one last hurrah over the Christmas period. Failed Brexit negotiations could also give the economy an unhelpful shove in the wrong direction.

A vaccine provides some much needed hope for the economy in 2021. But in the topsy turvy world of ultra-stimulative monetary and fiscal policy, good news can sometimes be bad news, because economic progress is offset by expectations that the props currently holding up the economy will gradually be kicked away.

We saw that most clearly during the "taper tantrum” of 2013, when the US economy improved to the extent that the central bank dared to suggest it might start to gently wind down its Quantitative Easing programme. Borrowing costs promptly spiked, with the 10 year US treasury yield almost doubling in fright.

If a vaccine can deliver us from coronavirus in 2021, we may once again witness that strange dance taking place between economic growth and stimulus withdrawal.

Read the latest GDP figures from the ONS.

These articles are for information purposes only and are not a personal recommendation or advice.


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Written by:
Laith Khalaf

Laith Khalaf is Finanial Analyst at AJ Bell. He began his financial services career in 2001 at Hargreaves Lansdown, where he worked a variety of roles across pensions and investments, covering both DIY and advised business. Laith began to focus on research and investments in 2007, becoming a leading industry commentator. He’s provided daily business bulletins on LBC, is a regular contributor to the financial pages of the national press, and a frequent guest on TV and radio. He has a degree in Philosophy from Cambridge University.