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Household consumption fuels Q2 growth
The UK economy expanded by 4.8% in Q2 as the easing of restrictions and the steady headway in the vaccination programme allowed households to go out and spend. Despite the solid Q2 rebound, GDP was 4.4% below its Q4 2019 level. Growth was in line with market expectations, but below the Bank of England’s projection of 5.0%.
Household consumption drove the recovery, rising by 7.3% in Q2, up from -4.6% in Q1. Pent-up demand was released as ‘non-essential’ retail, hospitality and workplaces opened up following a lengthy lockdown. Wholesale & retail and hospitality were the main contributors to growth in services in Q2.
However, households are expected to spend less in the coming months, with retail sales growth, in particular, projected to slow down. In July, BRC-KPMG sales grew by 6.4% - while a commendable rate of growth, it stood below the 3-month average of 14.7%. Mobility indicators and card spending data seemed to have levelled off recently, a sign that pent-up demand is dissipating.
Other factors will contribute to the decline in spending. Staff shortages and persistent rises in commodity, input and shipping costs, and additional paperwork and physical checks on EU imports in October and January are likely to trigger higher prices in shops. Coupled with the general rise in prices in the economy, from petrol to second-hand cars, these will erode households’ purchasing power and will depress sentiment, stalling retail gains.
Furthermore, discretionary spending is threatened by a potential deterioration of the labour market. As the furloughing scheme is winding down and will be completely phased out by the end of September, many households will likely find themselves in a precarious financial state. With still 1.9mill workers on furlough at the end of June, or about 6% of the UK labour force, it’s not clear how many of those would be able to find a job by the autumn. That’s because the economy is yet to make up ground lost during the pandemic and a resurgence of infections is restricting business activity. In July, the delta variant pushed business optimism about the year ahead to the lowest seen so far in 2021, and this might hinder investment and hiring. Moreover, the differential impacts of the pandemic across economic sectors means that it will take a while for workers to retrain and gain the skills required now.
The evolution of the virus and new variants might also mean that some voluntary social distancing will continue, dampening consumer spend further. A recent YouGov poll found that many people feel apprehensive about going to gyms or cinemas.
In summary, economic gains are thought to continue in Q3, but at a slower pace than in Q2 as spend is likely to lose pace. The Bank of England forecasts Q3 growth at about 3%. In line with last year’s developments, the evolution of the virus is the main source of uncertainty over the months to come. It’s too early to say whether the levelling off in infections over the last two weeks is a random fluctuation or the beginning of a trend, but if the virus is kept under control, there are chances of an even faster recovery.