"The BoE will need to decide when the best moment is to start tightening its monetary policy as some members like Andy Haldane already voted to scale back the stimulus program"
UK GDP is estimated to have grown by 2.3% in April, the fastest monthly growth since July 2020, according to the latest statistics from the ONS.
The service sector grew by 3.4% in April 2021, with consumer-facing services re-opening in line with the easing of coronavirus restrictions and more pupils returning to onsite lessons.
April’s GDP remains 3.7% below the pre-pandemic levels seen in February 2020, however it is now 1.2% above its initial recovery peak in October 2020.
Rory Macqueen, NIESR principal economist, commented: “Like March, April was a month of rapid growth in services output, as anticipated, driven by the re-opening of non-essential retail, outdoor hospitality and near-full attendance in schools. May will follow a similar pattern, as further restrictions are lifted, as will June if the final step of the roadmap goes to plan. But falls in construction and production, which were less affected by the 2021 lockdown, remind us that our focus should now be on the prospects for the economy in the second half of the year, after temporary re-opening effects have ceased to provide strong monthly increases.”
Hinesh Patel, portfolio manager at Quilter Investors, said: “Given this GDP reading covers April and doesn’t quite take into account all of the lockdown easing we have seen to date, the government will be pleased with the direction the economy is heading. Consumers are clearly making up for lost time and the government will be hoping they continue to spend the lockdown savings many have been fortunate to accumulate.
“Real-time data, such as restaurant and holiday bookings, also remains robust after the initial surge in April and we are seeing discretionary spending hold up as things look to get back to normal. There is obviously uncertainty about the last step of easing going ahead on time and Sunak will not want any delay to be long lasting. But, given the depths of where we were last year, the economy is clearly returning to health. The removal of social distancing when the time comes will give an additional turbo charge to the economy.
“Much of this optimism though is fairly priced into markets, however, and the Bank of England won’t be able to sit on their hands if the economic recovery strengthens further. With inflation concerns persisting, although slightly overblown in our opinion, Bailey and co may need to act sooner than they may wish.
“That said, the economy will never return to how it was before. It has gone through structural changes never seen before on this scale and as such will still need to be nursed along as it returns to sustainable growth. But the point will come where the spending taps will need to be switched off the economy stand on its own two feet again. When this is remains to be seen but for now the sun is shining and the roof is being fixed.”
Jesús Cabra Guisasola, Associate at Validus Risk Management, added: “The UK economy grew 2.3% in April (vs 2.4% estimated), which confirms the British economy is firmly recovering after contracting the most since 1709 last year. There are no doubts that the UK has been one of the countries coming out in a better position from the pandemic after the success of its vaccination program.
“However, there are reasons to be cautious as coronavirus cases continue rising, with the delta variant spreading rapidly. Prime Minister Boris Johnson and his government are now facing the dilemma of moving the country to the final stage of the reopening on the 21st of June. Moreover, the BoE will need to decide when the best moment is to start tightening its monetary policy as some members like Andy Haldane already voted to scale back the stimulus program during the last meeting.
“Nevertheless, there is optimism surrounding sterling in the coming months and any delay on the reopening would have a minimal impact on the recovery. Hence, we could see GBPUSD closer to the 1.45-mark, a level not seen since early 2018.”