Further to our previous article, the latest UK GDP statistics from the Office for National Statistics (ONS) highlight that the UK economy has continued with its recovery from the coronavirus pandemic and the three national lockdowns, with UK GDP increasing by 0.2% in August 2021 and by 0.6% in September 2021.
UK GDP
In their latest report, the ONS found that UK GDP has increased by 0.2% in August 2021 (revised down from what was originally reported to be 0.4%) and by 0.6% in September 2021. This follows on from what had originally been reported as a 0.1% rise in UK GDP in July 2021, but which has now been revised down to a 0.2% fall. The revisions were due to new data received from the services sector and from the from the motor vehicles, health, and oil and gas sectors. The net effect of all this is that UK GDP is now just 0.6% below its February 2020 pre-pandemic peak.
Looked at from a quarterly perspective, UK GDP grew by 1.3% in the third quarter - the 3 months to September 2021. However, that is down from the 5.5% growth registered in the second quarter. Nevertheless, the third quarter statistics are currently just a preliminary estimate, and it should be borne in mind that the original second quarter estimate was 4.8%, but when the statistics were later firmed up, they were revised up to 5.5%.
The main causes behind the sharp fall in the level of UK GDP growth in the third quarter were supply chain problems and labour shortages.
According to the International Monetary Fund (IMF), the UK economy is forecast to attain GDP growth of 6.8% in 2021, the highest in the G7 group of economies (which averages 5.3%). That is 1.7% higher than the European Union (5.1%), and 0.8 faster than the USA. Nevertheless, by some measures, the UK still lags behind some major economies in terms of its recovery from the pandemic. France, for example, is now just 0.1% below its February 2020 pre-pandemic peak, whereas the United States has now moved beyond its pre-pandemic peak.
The UK economy's recovery continues to be led by the services sector, which grew 0.7% in September 2021, with 'human health activities' leading the way with growth of 6.4%. As a whole, the services sector is now just 0.3% below its February 2020 pre-pandemic peak, although the consumer-facing services sector is still 5.5% below its peak. As a whole, the services sector grew by 1.6% in the 3 months to September 2021
The production sector contracted by 0.4% in September 2021, after registering growth of 1% in August 2021 following the reopening of oil fields following maintenance work. The fall in September was caused mainly by a decline in gas distribution. The production sector is now just 1.4% below is February 2020 pre-pandemic peak.
Nevertheless, the construction sector grew by 1.3% in September 2021, after having contracted by 0.7% in August 2021. It had also contracted by 1.2% in July 2021. The main causes of the falls in July and August were shortages in materials (e.g. glass, concrete, steel, and timber) and skilled labour. The recovery in September was due to an increase in new work (1.3%), in conjunction with an increase in maintenance and repair work (1.2%). The construction sector is now just 1% below its February 2020 pre-pandemic peak.
Meanwhile, the manufacturing sector contracted by 0.1% in September 2021, after having grown by 0.3% in August 2021. The sector is now 2.5% below its February 2020 pre-pandemic peak.
Problems Ahead
Despite the continued recovery, however, there are problems ahead in the form of a cost of living crises, increases in inflation, and potential stagflation.
Food, fuel, energy, and tax bills, and supply bottlenecks, have all increased over the last few months, and this has led to an increase in inflation, which now stands at 3.1%. Moreover, the chief economist at the Bank of England, Huw Pill, recently stated that by early next year: "I would not be shocked, let’s put it that way, if we see an inflation print close to or above 5%."
Some economists are even predicting that the UK economy could be facing a period of what is known as stagflation (i.e. falling or slow growth rates, high unemployment, economic stagnation, and rising/high inflation). This follows the release of the Institute of Directors (IoD) latest index on business confidence, which showed a sharp fall from +22% in July 2021, to -1% in September 2021.
The chief economist at the Institute of Directors, Kitty Ussher, stated: "The business environment has deteriorated dramatically in recent weeks. Following a period of optimism in the early summer, people running small and medium sized businesses across the UK are now far less certain about the overall economic situation and the IoD Directors’ Economic Confidence Index fell off a cliff in September. A higher proportion of our members expect costs to rise in the next year than expect revenues to rise."
UK GDP Growth Increase: Reaction
Responding to the new UK GDP figures, the chief UK economist at Capital Economics, Paul Dales, stated: "The recent broadening in shortages and the fuel crisis may mean that growth has come to a near-standstill since August."
The economist at EY, Martin Beck, added: "The recovery is certainly facing more headwinds. Rising inflation, driven by significant increases in energy prices, and the recent cut in Universal Credit are squeezing consumers' spending power."
