UK economy proving more sluggish than expected

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The UK economy is showing signs of stalling, growing by less than expected in August and contracting rather than rising in July.


The latest figures from the Office for National Statistics show GDP grew by 0.4% in August compared to a forecast rise of 0.5%, meaning it is 0.8% below its pre-pandemic level.


The previous month has been revised downwards to show a 0.1% fall rather than a 0.1% increase, mainly due to falls in car manufacturing as the global semiconductor shortage hit the sector.


But since then motor manufacturing has recovered somewhat, up 6.6% and helping the manufacturing sector to grow by 0.5% in August.


Services were the biggest contributor to the August rise, with output growing by 0.3%, helped by accommodation, food and entertainment in the first full month of lockdown restrictions being fully eased.


Construction contracted, with output down by 0.2% in August. The sector is now 1.5% below its pre-pandemic level.


Emma-Lou Montgomery, associate director at Fidelity International, said: “August’s 0.4% growth marks a small rebound on July’s stalling GDP figures, yet the worry remains that economic growth won’t even be in touching distance of pre-pandemic levels until well into next year.


“Shortages of HGV drivers and supply-chain disruption continues to trouble multiple sectors and is clearly dampening consumer confidence. Forecourts and shelves have been left empty, with mass recruitment drives yet to attract the number of staff urgently needed. This all comes in the crucial lead up to Christmas, when suppliers and retailers should be firing on all cylinders. But with households facing steep price rises for everyday items, from the food shop through to the gas bill, there will be little desire – or capacity – to spend, spend, spend.


“Policymakers will be keen to avoid this troubling mix of slow growth and rising prices from settling in for a sustained period of time, but this ‘stagflation’ doesn’t look like it will be going anywhere fast. There is a lot for the Chancellor to cover in The Treasury’s spending review and Budget announcement in a couple of weeks’ time, and he will undoubtedly aim to quell concerns while firming up faith in the UK economy. However, it’s what’s ahead that is concerning economists even more, with potential further hits to GDP lurking just around the corner.”


But the weakness may temper the Bank of England‘s thoughts of an interest rate rise this year.


Paul Dales, chief UK economist at Capital Economics said: “In the third quarter as a whole, GDP may have risen by around 1.4% quarter on quarter. That would be weaker than the 2.1% quarter on quarter rise the Bank of England expected in September. So while the chances of an interest rate hike this year have recently risen, a weaker activity outlook means it’s not a done deal.”


With recent surveys suggesting fuel shortages have led to declines in both non-fuel retail sales and restaurant visits, a sharp drop in households’ real disposable income expected in the fourth quarter, as energy prices rise and the government withdrawals its support, the recovery in consumers’ spending is expected to cool, said Pantheon Economics’ Samuel Tombs.


“The recent decline in consumers’ confidence also suggests that households likely will not spend the savings they have accumulated over the last 18 months.


“Finally, the depressing influence of Covid-19 on economic activity will build if confirmed cases continue to trend up, prompting some households to hunker down again, whilst also increasingly disrupting business’ staffing.”


All told, he forecasts that the final quarter of the year will expand only 1.2% compared to the third, meaning the UK’s recovery will lag most other advanced economies.


Tombs said this should reassure the Bank of England’s monetary policy committee that it only needs to hike interest rates gradually over the next 12 months.

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