Caution remains as GDP growth remains slow

Caution remains as GDP growth remains slow

The UK economy grew by 0.4 per cent in August but remains 0.8 per cent below its pre-coronavirus pandemic level in February 2020.

According to figures released today by the Office for National Statistics, this was the fifth consecutive month of gross domestic product growth, albeit at a slower rate than previous months.

Growth was driven by the services sector, reflecting the ease in lockdown restrictions and the gradual reopening of accommodation and food service activities, as well as a rise in underlying human health activities such as GP appointments

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Services output grew by 0.3 per cent in August 2021 and remains 0.6 per cent below its pre-Covid levels.

But Paul Craig, portfolio manager at Quilter Investors, said while the UK economy did register a degree of growth in August, at a modest 0.4 per cent, “it is clear the economic recovery is not quite in full swing”. 

He said: “The ONS also announced that the economy actually shrank in July, down by 0.1 per cent rather than the 0.1 per cent growth originally announced last month.

“Leisure and entertainment sectors, and other consumer-facing service sectors bounced back strongly in August, the first full month after July’s ‘freedom day’ in the UK. But this was offset by falls in other sectors of the economy. Most notably, a fall in the construction sector and a fall in the healthcare activity sector.”

Overall, gross domestic product grew by 2.9 per cent in the three months to August 2021, mainly because of the performance of the services sector.

Meanwhile, the construction sector fell by 0.2 per cent in August 2021, placing the sector 1.5 per cent below its pre-pandemic level.

Craig said: “The creaking UK economy is taking its time to spring back to life. The problems lie now not with demand but with supply. 

“Acute labour shortages in several pockets of the economy along with chronic skills shortages have the potential to frustrate the economic recovery, and could well dampen any expectations for a strong economic revival over the winter months.”

He explained that the UK economy will be going through structural changes as it establishes the future relationship with Europe and the outside world after Brexit. 

“This structural dislocation will no doubt weaken growth expectations,” he said.

But elsewhere, Sarah Giarrusso, investment strategist at Tilney Smith & Williamson, was a little more positive.

She said: “As we move through the ‘post-pandemic’ re-opening period, challenges continue to arrive, supply chain disruptions have been a hindrance to the industrial sector, where output remains constrained. 

“However, as vaccination rates are high and restrictions have been lifted, the boost to services has offset the lower level of industrial production.”

She added: “However, the UK does still face headwinds, such as labour shortages and supply chain disruption which could lead to higher, stickier inflation.

“Despite this, consensus forecasts for 2021 and 2022 annualised real GDP remain firmly in expansionary territory at 7.0 per cent and 5.3 per cent respectively. We expect the UK economy to continue its recovery and the environment to remain conducive for equities to outperform bonds.”