Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
This time last month, we learned that UK GDP data had beaten expectations by rising 1% over December, but had fallen 9.9% over the year as whole, the economy’s worst contraction in over 300 years.
Just as we saw then, today’s GDP figures contain both good and bad news.
First, the good. The UK economy contracted 2.9% over January, leaving GDP 9% lower than its pre-pandemic peak. Services, which account for around 75% of the economy, took the biggest hit, falling 3.5%. Construction, meanwhile, grew over the month by 0.9%.
That doesn’t sound great but, given January was spent in lockdown, a 2.9% fall is far better than the 4.9% economists had expected.
January’s data demonstrate how companies and consumers have adapted to lockdown conditions. A 2.9% contraction is a fraction of April’s 18.3% collapse, the last time restrictions were this severe. It’s only slightly worse than November’s 2.3% slump, in which lockdowns were imposed but schools remained open.
Given the speed of the vaccine rollout and consequent hopes for a faster-than-expected bounce back in activity, January’s figures offer a positive platform for the rest of the quarter. Last week, the Office for Budget Responsibility said it expected the economy to return to its pre-pandemic size in the third quarter of 2022, earlier than previously forecast.
The bad news is that UK-EU trade took a massive hit over the month. Exports to the EU fell 40.7%, while imports fell 28.8%. The combined decline is the worst on record.
The largest decline was seen in food products, where new layers of bureaucracy resulted in a 63.6% fall in exports to the EU over the month.
Some of this will rightly be ascribed to teething problems - the first month was always going to be tricky - while stockpiling of products prior to the exit date also won’t have helped. Lockdowns and virus mutations will also have combined to knock trade. But a 40% fall is extreme, and casts a new shadow over an already acrimonious divorce. Simply put, it is harder now to export to the EU.
The question now is one of how permanent the Brexit scars will be on UK trade. It’s obvious enough that last month’s fall goes beyond teething difficulties, but the extent of the lasting impact remains hard to gauge. The coming months should help paint a clearer picture.
Another question is where this leaves UK investors. We’ve said recently that now may be a good time for investors to turn toward our home shores, which have been battered recently by tidal waves of Brexit uncertainty and the pandemic. A change in the wind could usher in a reversal of fortunes. At least some of the uncertainty around Brexit has dissipated, and vaccine-induced economic bounce back should particularly favour the sectors that make up our economy (e.g. services).
Today’s GDP and trade data do little to change that long-term story. It’s important not to read too much into retrospective data like these, when it’s the future that really matters for investors. They do encourage a little caution, however. The idea that GDP will improve as vaccines are rolled out remains true, but the lasting Brexit impact is still something of an unknown.
At the same time, it’s worth noting that EU trade is unlikely to have a significant impact on your UK investments. The FTSE 100 index of the UK’s largest companies is largely shielded from Brexit forces because of its international focus. Around three quarters of the earnings of the UK’s top 100 listed companies actually come from overseas.
The UK is a tricky market, but looking beyond the headlines it could still present an opportunity. Fidelity investment director, Tom Stevenson, saw potential in the UK when he picked his 2021 ISA fund picks. However, he was unsure whether the best way to capture its recovery was through a value or growth focused fund. As a result, he’s picked one of each - the Fidelity Special Situations Fund and the Fidelity UK Select Fund. You can find out more about these funds, and the rest of Tom’s picks, here.
Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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