U.K. Economy Grows Less Than Expected as Services Disappoint

(Bloomberg) --

The U.K. economy grew less than expected as shoppers reined in spending, raising doubt about whether output will return to pre-pandemic levels this year.
 
Gross domestic product rose 0.4% in August, the Office for National Statistics said Wednesday. A series of revisions showed an unexpected drop in July, leaving the economy 0.8% smaller than it was when Covid-19 struck in February 2020.

The figures add to evidence Britain’s recovery is being squeezed by supply shortages and a jump in the cost of goods. That may give the Bank of England reason 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.  

The data did little to disrupt investors’ view that the BOE will hike rates this year. Markets are betting on the first move coming in December, with a further two increases by the middle of next year.

Growth of more than 2% will be needed in September if the third quarter overall is to expand by 2.1%, as the BOE recently predicted. That’s unlikely, meaning the economy may remain short of pre-Covid levels on a quarterly basis until next year.

What Bloomberg Economics Says ...

“The final quarter of the year will be challenging amid a continued supply crisis, soaring energy prices and a squeeze on household incomes. We don’t expect quarterly GDP to reach its pre-pandemic level until early next year.”

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

Households are also facing a cost of living squeeze that threatens to weigh on spending, with energy bills and taxes set to increase sharply in the spring. 

The ONS said services grew 0.3% in August, half the pace expected because of drops in retail sales and health care output. Construction shrank during the month, but both manufacturing and industrial production were stronger than expected. 

“The recovery is certainly facing more headwinds,” said Martin Beck, senior economic adviser to the EY ITEM Club. “While growth will likely slow over the rest of this year and into 2022, the expansion should prove to be down, but not out.”
 
The report comes a day after data showing the labor market remained in robust health last month, reflecting a boom in hiring after the end of lockdowns. Policy makers are hoping that means employers will absorb many of the 1 million people who were still receiving furlough benefits when the program ended on Sept. 30.

Total imports of goods, excluding precious metals, fell 3.1% in August, while total exports also dropped 4.6%, with the gap between imports to European Union countries and non-EU members closing to its narrowest since the end of the Brexit transition period. The ONS said it was unclear whether this reflected short-term pandemic disruption or longer-term supply chain recalibration. 

“With the ongoing pandemic and recession, it is difficult to assess the extent to which this reflects short-term trade disruption or longer-term supply chain adjustments,” the ONS said.

Brexit red tape and limits to doing business with the EU remain the biggest pressure point on firms’ bottom lines, said Ana Boata, head of economic research at trade credit insurer Euler Hermes. 

“Added to the mix is the uncertainty created by the Northern Ireland border dispute that further enforces the narrative that this could be a difficult winter for trading with the U.K.,” she added.
 
Gains in growth since lockdown are a fillup for Chancellor of the Exchequer Rishi Sunak as he prepares to deliver his annual Budget on Oct. 27. The budget deficit in the current fiscal year is forecast to come in well below official forecasts made in March, though progress in repairing the public finances is expected to slow.

 “Our 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,” Sunak said in a statement.

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