Chip Shortage Weighs on U.K.’s Recovery as Car Output Plunges

Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

The global chip shortage took a toll on the U.K. economic recovery in May, disrupting manufacturing and sending car and truck production plunging at one of its fastest rates on record.

An unexpected drop in factory output as well as construction meant that growth in the overall economy slowed to 0.8%, about half the rate expected, the Office for National Statistics said Friday. It was slower than April’s gain of 2% when restaurants and stores started to reopen, a figure that also was revised lower.

The semiconductor supply crunch that started last year has cut production in multiple industries, particularly automakers. Earlier this week, Renault SA Chief Executive Officer Luca de Meo warned the effects will be felt through next year. In Britain, export sales were negative for the first time since January, which the ONS said was due to “pressures following the U.K.’s departure” from the European Union.

“The recovery is losing a little steam as the temporary boost, from the earlier phases of reopening, fades,” said Suren Thiru, head of economics at the British Chambers of Commerce. “Economic activity may remain muted in June as the impact of rising Covid infections and the delay to the end of the roadmap” for dropping restrictions.

Chip Shortage Weighs on U.K.’s Recovery as Car Output Plunges

Production of transport equipment plunged by 16.4%. Prior to the pandemic, that segment last experienced a fall of that magnitude in January 1974, when strikes by coal miners cut back industry to working three days a week. The ONS said May’s drop was mainly due to a shortage of chips.

Construction output fell 0.8%, the second monthly drop in a row and a sharp contrast with recent surveys suggesting strong growth.

Gross domestic product is now 3.1% below where it was in February 2020, before the pandemic struck. The Bank of England predicts a full return by the end of the year, driven by consumers unleashing pent-up savings accumulated during lockdowns. A surge for retailers and hospitality companies is stoking price pressures and fueling speculation about when the central bank could rein in its stimulus program.

Chip Shortage Weighs on U.K.’s Recovery as Car Output Plunges

Accommodation and food services surged 37% in May as pubs and restaurants were allowed to start serving customers indoors. The segment’s output remains 3.4% smaller than it was before the start of the pandemic.

“It’s great to see people back out and about thanks to the success of the vaccine rollout, and to see that reflected in today’s figures for economic growth,” Chancellor of the Exchequer Rishi Sunak said in a statement.

The pound held near the lowest level in more than two months, trading 0.1% lower to $1.3776.

What Bloomberg Economics Says

“The pace of recovery slowed by more than we expected in May, and with infection rates rising there’s a risk the economy stutters over the summer. That could mean it fails to reach its pre-pandemic level at the end of this year -- missing our forecast and the Bank of England’s.”

--Dan Hanson, Bloomberg Economics. Click for the REACT.

However, risks to the outlook abound. Job support programs are being wound down, and Prime Minister Boris Johnson plans to lift all remaining restrictions on July 19, despite the delta variant of coronavirus driving a fresh wave of infections. The worry is that doing so when millions of people are not fully immunized could backfire and force the government to re-impose restrictions.

“While more businesses were able to reopen their doors, times remain tough for our hardest hit sectors, particularly aviation and international tourism,” said Rain Newton-Smith, chief economist at the CBI, Britain’s biggest business lobby group. “With further pent-up demand providing an engine for growth, all signs point to a promising economic outlook.”

Even if June’s GDP reading shows no change from May, the economy will grow by 4.5% in the second quarter, the fastest pace since 1973 barring the post-lockdown rebound in the third quarter of last year, the ONS said.

Trade statistics that were due to be published alongside GDP were delayed until later Friday due to technical issues, the ONS said.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.