UK economy grows 0.1% in July as shortages hamper post-Covid recovery

Businesses struggled with staff shortages amid 'pingdemic', supply chain challenges and rising cases of Delta variant

The construction sector saw output drop 1.6 per cent in July, the ONS said. Bloomberg

Britain’s economy grew by just 0.1 per cent in July when the final set of Covid-19 restrictions were lifted allowing businesses to fully reopen.

While it was the economy’s sixth consecutive month of growth, the increase was a slowdown on the 1 per cent recorded in June, according to the Office for National Statistics (ONS).

Businesses struggled with staff shortages amid the “pingdemic” caused by the NHS’s over-sensitive Covid-19 app forcing people to isolate at home, while shortages of raw materials hit the construction sector.

Despite the slowdown, Chancellor of the Exchequer Rishi Sunak said the UK’s recovery “is well underway thanks to the success of the vaccination rollout and the roadmap, with more employees on payrolls that at any point since last March”.

“I am confident that – supported by our Plan for Jobs – we’ll continue to recover from the pandemic, we’ll see more new jobs, and we will Build Back Better,” he said.

The construction sector saw output drop 1.6 per cent in July, the fourth monthly contraction in a row, amid rising costs and shortages of materials, the ONS said, while retailers suffered a 2.5 per cent fall.

Jonathan Athow, ONS deputy statistician, said oil and gas provided the strongest boost to GDP contributing to the production output growth of 1.2 per cent, while car production also continued to recover from recent component shortages.

"The service sector saw no growth overall with growth in IT, financial services and outdoor events - which could operate more fully in July - offsetting large falls in retail and law firms," Mr Athow said.

AJ Bell financial analyst Danni Hewson said while July brought “freedom” from restrictions - a hugely anticipated milestone that signalled the UK was back in business - the reality was bogged down by supply snarl-ups and labour shortages as workers became hostages of the “pingdemic”.

“Significantly the economic engine slowed so much in July it almost stalled and delivered the kind of growth not experienced since the country was plunged back into lockdown in January," said Ms Hewson.

“Even more worrying is the fact that much of the 0.1 per cent of growth achieved seemed to come from the return to service of an oil field production site which had been closed for maintenance, without that push these figures would have been even more uncomfortable to peruse.”

One positive sign came from the arts, entertainment and recreation sector, which was boosted by 9 per cent after restrictions on social distancing were lifted from July 19.

The figures put a dent in the recovery from the pandemic, with GDP still 2.1 per cent behind its February 2020 level, just before the pandemic hit.

Stuart Cole, chief macroeconomist at stockbroker Equiti Capital, said the disappointing July GDP reading underscores fears the pace of the UK recovery is slowing.

“The slowdown has been flagged by a mix of recent data, including the PMI and retail sales figures, which have been pointing to a combination of supply-chain issues, rising prices, worries over the delta variant and the somewhat over-zealous approach to the Government’s test and trace programme over the summer as weighing on activity,” Mr Cole said.

The boost from the final lifting of lockdown restrictions in July was always going to fade at some point, but concerns among policymakers may start to be growing that this boost is fading faster than expected, Mr Cole said, with the next big hurdle facing the economy the ending of most government support measures this month, including the jobs furlough scheme.

"Fears over the rising number of delta variant infections and the suggestions of a ‘firebreak’ lockdown being needed in October to prevent a spiral in cases over the winter period will do nothing but suppress both consumer demand and confidence," Mr Cole said.

Alpesh Paleja, lead economist at the Confederation of British Industry, said businesses hope the bulk of supply disruption will prove temporary, but firms are not confident all shortages will fade any time soon.

"To help ease these pressures, temporary, targeted interventions are needed to enable businesses to keep their doors open," he said.

"Longer-term, both business and Government must invest in reskilling and training, particularly in areas that support meeting future demand."

Meanwhile, Britain's goods trade deficit hit a seven-month high in July at £12.7bn, widened by a slowdown in exports to the European Union which have been hit by post-Brexit.

Imports of goods fell from EU countries, driven especially by clothing and footwear imports, the ONS said.