UK recovery loses momentum as Covid-19 effects linger

The latest monthly UK GDP estimate shows the economy returning back to growth on a rolling three-months basis – up 8% compared to a -7.6% contraction in July, which should ensure double digit growth for the third quarter.

However, the data also reveals a significant loss in momentum, as monthly growth was down from 6.6% in July to 2.1% in August. Though this is only slightly below the Schroders forecast of 2.4%, it was markedly lower than consensus estimates of 6.6%.

Within the sectoral breakdown, industrial production disappointed as it only eked out 0.3% growth. The manufacturing sub-index grew by 0.7%, mirroring the slowdowns seen across Europe over the summer.

Meanwhile, activity in services grew by 2.4% compared to consensus expectations of 5%. The government’s flagship “eat out to help out” scheme combined with a VAT cut for the accommodation and food services sectors certainly made an impact. Accommodation services saw a 75.8% jump in the volume of transactions, while food and beverage services saw a 69.7% rise. This leaves the combined sectors a little over 13% below the level of activity reported before Covid-19 related lockdowns began in February.

While the gains made for these sectors are positive, these two sectors only represent 2.9% of economic activity. Information & communications, which is just over twice as large, contracted by 0.4% over the quarter.

Looking ahead, we are likely to see a pullback in activity for restaurants and bars as not only has the government discount scheme ended, but new restrictions have been introduced to limit activity after 10pm. Moreover, localised restrictions have been spreading across Northern England, Wales and Scotland, with the latter closing pubs and bars for a temporary period to attempt to halt the spread of Covid-19.

Unlike March, the government’s strategy of localised restrictions coupled with track and trace rather than national lockdowns are clearly designed to help keep the economy from suffering a double dip recession. The return of schools in September should lift activity in education (5.7% of GDP), and keeping workplaces open will help maintain some growth.

However, with a new peak in the recorded number of cases, the spread of the virus is likely to hit consumer confidence, which should lead to slower growth, if not a fall in retail sales in the coming months. Retailers are already concerned that social restrictions on gatherings could hit Christmas celebrations and therefore spending.