Economy picks up as Covid restrictions end but supply chain woes take a toll

Britain’s economy grew in August as the full lifting of coronavirus restrictions boosted events and hospitality, but official figures revealed a contraction in July.

The Office for National Statistics (ONS) said gross domestic product (GDP) rose 0.4% between July and August in the first full month after all Covid-19 restrictions ended in England on July 19.

Britons rushing out to festivals, theme parks and events helped see the hard-hit arts, entertainment and recreation sector bounce back with growth of 8.5%.

UK economic growth GDP
(PA Graphics)

The August rise in GDP means the economy is now only 0.8% smaller than it was before the pandemic.

But the data showed further signs that the recovery is easing as global supply chain woes take their toll.

Growth in August was lower than expected, while the ONS also downwardly revised its estimate for July to a contraction of 0.1% from the 0.1% expansion reported previously.

The economy will also need to soar by 2.1% in September to remain on track with the Bank of England’s forecast for overall growth of 2.1% in the third quarter.

Darren Morgan, director of economic statistics at the ONS, said: “The economy picked up in August as bars, restaurants and festivals benefited from the first full month without Covid-19 restrictions in England.”

The revised GDP figure for July was the first contraction since January this year, when the winter lockdown weighed on the economy.

Growth rebounded strongly in the second quarter, with GDP rising by 5.5%, but the recovery since then has been sluggish, with supply chain problems and the lorry driver crisis holding back the economy.

The ONS data showed that output in the construction sector fell for the second month running, down by 0.2% in August following a 1% decline in July, as supply issues led to shortages of key materials and rocketing prices.

Having recovered in April to be 0.9% above levels seen before the pandemic, the construction sector is now 1.5% below its pre-Covid level.

The ONS added that July’s contraction was also partly due to the difficulties in the car manufacturing industry, which has been affected by a global shortage of microchips.

Samuel Tombs, at Pantheon Macroeconomics, said it is “implausible” that growth will rise enough in September to remain on track with Bank forecasts, particularly given that the full force of the supply crisis is set to be felt from September onwards.

He estimates that the Bank will cut its prediction for third-quarter growth to 1.5% in its next set of forecasts in November, which will likely stay its hand over raising interest rates, despite surging inflation.

Financial markets are now betting on rates to rise from 0.1% to 0.25% by the end of the year to cool soaring prices.

But Mr Tombs said: “The continuation of modest GDP growth in August should convince the MPC (Monetary Policy Committee) that the economy does not need to be cooled immediately by raising interest rates.”

Separate data from the ONS on Wednesday showed the UK’s total trade gap widened to £3.7 billion in August from £2.9 billion in July.

But the data suggested the impact of Brexit on trade between the UK and Europe is easing.

While imports from non-EU countries were still higher than those to the bloc in August, the gap was the narrowest since Brexit on January 1.

Imports of goods from the EU were down £100 million in August, the ONS said, with total imports falling £1.3 billion.

British exports of goods also fell by £1.3 billion, with exports to the EU down 4.3% but by a greater 5% to non-EU countries.