Is the UK economy in trouble?

15th July, 2021

UK fund managers have optimistically talking about a sparkling recovery for the UK economy. With Brexit behind us, the vaccine rollout continuing and consumers brimming with confidence, it should be a bumper year of growth, they suggest. However, two data points this week put that recovery in doubt.

The first was some distinctly unsparkling GDP data. The UK economy grew 0.8% in May, significantly below consensus expectations of 1.5% growth and much slower than the 2% growth seen in April. The result might be strong in normal times, but the economy is still 3.1% below its February 2020 levels and a better bounce-back had been expected.

There were some obvious drivers for this weakness. Azad Zangana, Schroders senior European economist and strategist, said: “It appears that supply shortages and production bottlenecks have played a role, as manufacturing output contracted by 0.1%, following no growth in April. The Office for National Statistics reports microchip shortages caused significant disruption to car production, as the manufacture of transport equipment fell by 16.5% – the largest fall since April 2020. Supply shortages for the construction industry may have also held up work, as the sector saw output contract for the second consecutive month.” Services activity was stronger, but still below consensus expectation.

The other problem is inflation. Just a few months ago inflation sat at 0.4%. Today, it has risen to 2.5%, pushed higher by the price of food and second hand cars. This puts it above the Bank of England’s target for a second consecutive month. Rupert Harrison, multi-asset portfolio manager at BlackRock, has described central bankers as engaging in a “high stakes” inflation experiment. In a column for the Evening Standard, he says: “if the inflation genie does get out of the bottle again, getting it back in would have serious side-effects for all of us.”

The central banks are betting that the genie will stay put. Once bottlenecks are cleared and the immediate excitement over reopening dissipates, normal service will resume. However, it has to be worth considering the risks if this doesn’t happen. Lacklustre growth and high inflation is a recipe for economic hardship.

Zangana cautions against reading too much into a single data point. “Assuming a similar growth rate for June, the economy should record over 5% growth for the quarter. As restrictions continue to be removed, we expect more businesses to return to some form of normality, supported by strong pent-up demand from the household sector.”

The ramifications of Brexit are yet to be determined, while high debt and high inflation could exert a drag on growth. Even if freedom day arrives on the 19th July, the UK economy faces some considerable challenges.

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

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