Did the UK bounce-back?

18th October, 2021

The latest round of UK GDP figures included the first full month without Covid restrictions. With that in mind, investors might have been hoping for a little bit more. UK GDP for August rose 0.4% month on month, but July’s figures were revised lower.

These figures included the Great British Staycation and certainly, domestic holidays were buoyant, with hotels and campsites rising 23% month-on-month. Arts and entertainment were also strong, as people tentatively went back to theatres, art galleries and cinemas. However, the figures show that it will take more than this to get the UK economy back on its feet.

On the negative side, construction was hit hard by shortages or raw materials and workers. Motor manufacturing is struggling from a lack of semiconductors. Energy-intensive industries are also reporting difficulties, as high prices hold back production.

Then there’s the consumer. Retail sales continue to disappoint in the UK. Data released in September showed retail sales falling for the fourth consecutive month. Volumes fell 0.9%, against expectations of a 0.5% rise. This is before consumers need to contend with higher energy prices, higher taxes and inflation on key goods and services.

While some workers will be getting pay rises, this isn’t universal. Public sector pay, for example, looks set to remain largely unchanged. While much has been made of the savings built up during the pandemic, it may be that a lot of that money will stay saved rather than spent. If goods shortages continue, there may be nothing to tempt people to buy. Against this backdrop, it is difficult to see how consumer spending, the engine of growth in the UK economy, can make significant progress.

The IMF has downgraded its outlook for full-year UK GDP and is now forecasting growth of 6.8%. This is still high, but perhaps not high enough to weather the various incoming storms. The market is still expecting the Bank of England to raise rates in late 2021/early 2022. This seems bold given the waning economic momentum, but may prove to be a necessity with rising prices.

It’s a strange and unpredictable environment for the UK economy today. Perhaps supply chain problems will lift, pent-up savings will be released and we’ll be looking at an economic boom in time for Christmas. However, it would be a mistake to bet the turkey on it.

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This article was sourced from Adviser-Hub.co.uk.

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