UK economic growth disappoints amid supply chain crisis

GDP grew 0.4% in August, leaving economy just 0.8% below pre-pandemic levels

Britain's economy grew by 0.4 per cent in August, leaving it just 0.8 per cent smaller than pre-pandemic levels.

But the figures suggest a slowdown in the recovery as supply chain woes take their toll.

Economic output fell short of expectations of 0.5 per cent growth, despite improved trading at hospitality venues such as restaurants and cafes after Covid-19 restrictions were removed, the Office for National Statistics said.

The ONS also revised down its GDP figure for July on weaker data from industries such as car manufacturing, with the economy now believed to have contracted 0.1 per cent in July, rather than growing 0.1 per cent.

Chancellor of the Exchequer Rishi Sunak said the economic recovery is continuing “with more employees on payrolls than ever before and the UK forecast to have the fastest growth in the G7 this year”.

“As we rebuild from the pandemic, we are taking action to ensure our economy remains strong by helping people find great work,” he said.

The services sector made the biggest contribution to an increase in economic output in the first full month after all Covid restrictions were lifted in England on July 19, with arts, entertainment and recreation growing 9 per cent, boosted by sports clubs, amusement parks and festivals.

There was also more demand for hotels and campsites.

However, this was offset by declines in health activity, said Darren Morgan, director of economic statistics at the ONS, with fewer people visiting doctors and less testing and tracing.

“However, later and slightly weaker data from a number of industries now mean we estimate the economy fell a little overall in July,” Mr Morgan said.

Susannah Streeter, senior investment and markets analyst at investment platform Hargreaves Lansdown, said the economy cannot rely on “happy campers” to sustain growth, given the storm clouds that have gathered over supply chains since the summer.

“It’s likely that the 0.4 per cent growth in economic output overall in August was partly put due to the mini bounce back from the 'pingdemic', which pushed a million people into self isolation in July,” Ms Streeter said.

“Weakness is seeping through these figures, especially in the construction sector which shrank again for the fourth month in a row, by 0.2 per cent … raw material shortages are likely to have been partly to blame, as well as the difficulties of getting boots on the ground in building sites as sectors fight for skills, with 1.1 million vacancies opening up between July and September.”

August saw the second monthly fall in output for the construction sector, which suffered a 1 per cent decline in July as supply issues have led to shortages of key materials and rocketing prices.

Despite recovering in April to be 0.9 per cent above levels seen before the pandemic, the construction sector is now 1.5 per cent smaller than its pre-Covid level.

July's contraction was partly due to difficulties in the car manufacturing industry, the ONS said. This continued in August, with August suffering a 27 per cent decline as just 37,000 cars were manufactured due to a global shortage of microchips – down from 51,000 manufactured a year earlier.

The revised GDP figure for July was the first contraction since January, when the winter lockdown weighed heavily on the economy.

Growth rebounded in the second quarter, with GDP rising by 5.5 per cent, but the recovery has been more modest than expected, with supply chain problems and the lorry driver crisis holding back the economy.

The dismal data adds to evidence Britain’s recovery is being squeezed by supply shortages and a jump in the cost of goods. That might cause the Bank of England to delay an increase in interest rates that financial markets anticipate will come this year.

“The prospect of rising costs, further disruptions, and a potential winter wave of Covid cases could threaten a fragile economic recovery,” said Yael Selfin, chief economist at KPMG UK.

Meanwhile, total imports of goods, excluding precious metals, fell 3.1 per cent in August. Total exports also dropped 4.6 per cent, with the gap between imports to EU countries and non-EU members closing to its narrowest since the end of the Brexit transition period.

“With the continuing pandemic and recession, it is difficult to assess the extent to which this reflects short-term trade disruption or longer-term supply chain adjustments,” said Ana Boata, head of economic research at trade credit insurer Euler Hermes.

Any gains in growth since lockdown are a boon for Mr Sunak as he prepares to deliver his annual Budget on October 27. The budget deficit in the current fiscal year is expected to come in well below official forecasts made in March, though progress in repairing the public finances is expected to slow.

However, with output still 0.8 per cent below pre-pandemic levels in August, Ms Streeter said price rises, fuel shortages and labour shortages are “potholes in the road which are likely to have put a brake on growth in September”.

“It certainly won’t be an easy ride for Bank of England policymakers when they meet next to decide when to raise interest rates. Moving too sharply could see the economy go into reverse, but the Bank won’t want to risk losing credibility if prices keep accelerating,” she said.