U.K. Economy’s Coronavirus Rebound Grinds to a Halt in July
The U.K. economy barely grew in July, suggesting the recovery from the coronavirus recession is rapidly levelling off as consumer spending weakens and supply disruptions hamper production.
Gross domestic product expanded just 0.1% -- a tenth of the pace posted in June, the Office for National Statistics said Friday. Economists surveyed by Bloomberg had expected 0.5% growth.
The figures left output 2.1% below the level in February 2020, before the pandemic struck. The slowdown heralds a return to more normal growth rates after pent-up demand following the lifting of restrictions in the spring saw the economy surge by almost 5% during the second quarter.
The ONS cited staff shortages and supply-chain problems as an impediment to production.
Services and manufacturing stagnated and construction output declined in the weakest month for the economy since January, when a third lockdown caused output to slump. Oil and gas provided the strongest boost as some pipelines reopened following maintenance.
The loss of momentum in July, when the economy completed its reopening, also reflects concerns about the spread of the delta variant and a requirement for hundreds of thousands of people to stay at home after being pinged by a National Health Service contact-tracing app.
The pound shrugged off the news, with the currency edging higher to $1.3880 as of 9:45 a.m. London time.
That’s a sign that traders are more focused on the outlook for the Bank of England. In testimony to Parliament this week, Governor Andrew Bailey acknowledged growth was plateauing, but reiterated it was “reasonable” to expect rate hikes would come in coming years. He also revealed BOE officials were evenly split in August over whether a minimum criteria for tighter U.K. monetary policy had been met, and that he sided with those who thought it had.
Still, the economy now faces an uphill battle to achieve the near 3% growth in the third quarter forecast by the Bank of England last month. That will require output to expand by around 1.9% on average in both August and September. Bloomberg Economics sees growth of 2.2% with “downside risks” during the quarter.
What Bloomberg Economics Says...
“Our forecast assumes a re-acceleration in August, as the virus situation stabilized. Still, the twin threats from a shortage of suitably skilled workers and ongoing global supply chain disruptions are likely to hamper the pace of the rebound.”
--Niraj Shah, Bloomberg Economics. For full REACT click here
Output in consumer-facing services fell by 0.3% in July, largely due a 2.5% fall in retail sales.
ONS Deputy National Statistician Jonathan Athow said IT, financial services and outdoor events –- which could operate more fully in July -– offset large falls in retail and law firms. Rising costs and shortages of raw materials “pegged back” the construction sector.
More difficulties lie ahead, with several support programs put in place to help people through the crisis due to come to an end this month. They include the government’s flagship furlough plan, which was still supporting around 1.6 million people last month, and a temporary uplift to welfare benefits.
Meanwhile, workers and businesses face higher payroll taxes from April under an annual 12 billion-pound ($17 billion) plan announced this week to boost funding for the National Health Service and social care.
“It now looks like the wait for the U.K. to regain the ground lost since the start of the pandemic will last well into next year,” said Ed Monk, associate director at Fidelity International. “What’s concerning is that these numbers may not yet be showing the full effect of sustained supply-chain bottlenecks.”
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