Challenges Weigh On Growth
UK output grew by 0.4% in August, above the July’s (revised) fall of 0.1% (the first estimate of July’s growth stood at +0.1%). This means UK’s GDP remains 0.8% below its level of February 2020.
The service sector was the main contributor to growth in August, as accommodation, food services and tourism continued to recover. However, growth in consumer-facing services was partially offset by a 1.9% fall in the wholesale and retail trade sector. But while the UK’s economy rebounded quickly from the pandemic, global disruptions in both production and shipping are stalling growth. Sales of motor vehicles were close to their pre-pandemic levels in August, but the car manufacturing output remains 19.8% lower. Output in the construction sector fell for the second consecutive month, due to shortages of steel, concrete, timber and glass.
Pandemic-related restrictions, shortage of key commodities and port bottlenecks have triggered crippling supply shortages all over the world, and the UK was not spared. Retailers bear the brunt of supply chokeholds, as households shifted their consumption towards goods and these spending changes appear more persistent than originally thought.
Several other factors have darkened UK’s growth outlook, inflation fears being a particularly strong one. It’s expected that prices will rise over 4% by the end of the year. The Bank of England sees the acceleration of inflation as temporary. However, a sharp rise in prices, even temporary, will depress real incomes, reducing spend. And this comes against the backdrop of the end of the furloughing scheme and the cut to universal credit payments, and of significant rises in energy prices. This means that less affluent households with lower disposable income will feel these impacts disproportionally, and will likely cut back on discretionary spending.
Moreover, a rapid rise in inflation risks becoming embedded in the public’s expectations, which could trigger a spiral of wage and price increases, putting the brakes on growth.
And severe labour shortages are compounding these issues. The number of vacancies passed the 1 million mark in August, with all industry sectors increasing their number of vacancies and the majority reaching record levels, but the unemployment level was higher than its pre-pandemic level and 1.3mill workers remained furloughed at the end of August. It’s not clear how to align these facts, one likely explanation points to a permanent shift in the make-up of the economy. Retail faces shortages of HGV drivers, workers in fulfilment warehouses and workers with digital capabilities.
In sum, the UK is confronted with significant structural changes in its economy. The economic rebalancing would take time, and fiscal and monetary support is needed to ease the transition.