Press release

11 Sep 2020 London, GB

UK economy starts third quarter on front foot with GDP growth of 6.6% month-on-month in July – EY ITEM Club comments

The UK economy started Q3 on the front foot with robust month-on-month GDP growth of 6.6% in July. This built on the economy’s increasing signs of recovery at the end of Q2.

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Related topics Growth COVID-19
  • The UK economy started Q3 on the front foot with robust month-on-month GDP growth of 6.6% in July. This built on the economy’s increasing signs of recovery at the end of Q2. The economy is now 18.6% larger than it was at April’s low, although it is still 11.7% below February’s level before the main impact of COVID-19
  • While July’s month-on-month GDP growth was down from 8.7% in June, this is an encouraging performance. There was heathy expansion across all output sectors as activity was boosted by the progressive easing of COVID-19 restrictions
  • July marked a third successive month of growth, although the size of April’s contraction meant that GDP was still down 7.6% in the three months to July compared to the three months to April. However, this was a significant narrowing from the peak fall of 20.4% in the three months to June compared to the three months to March
  • The services sector benefitted in July from the progressive opening of the hospitality sector, expanding 6.1% month-on-month. It was also lifted by a rise in education output as some children returned to school. Retail sales also continued to benefit from the release of earlier pent-up demand
  • The healthy gain in services output was backed up by respective output gains of 6.3% in manufacturing and 17.6% construction
  • The economy looks to have maintained momentum in August, remaining on course for a strong Q3 bounce back from a record Q2 contraction. Consumer spending seemingly continued at a robust rate with the ‘Eat Out to Help Out’ scheme helping, the housing sector currently seeing a good pick-up in activity, and services and manufacturing activity looking healthier. However, there are indications that business investment remains very weak
  • The EY ITEM Club expects GDP growth of at least 12% quarter-on-quarter in Q3 and it could now reach around 15% as the economy benefits from reduced lockdown restrictions and the release of pent-up demand
  • However, the EY ITEM Club suspects growth is likely to slow in Q4 as unemployment rises markedly following the ending of the furlough scheme in October and as the boost from pent-up demand wanes
  • Uncertainties over the future UK-EU trade relationship could also affect economic activity in Q4, as could some increased restrictions caused by a growing number of COVID-19 cases

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The UK economy got off to a strong start in the third quarter, benefitting from the progressive easing of lockdown restrictions that had started in May and then taken a step forward in June.

“GDP growth of 6.6% month-on-month in July was a robust performance following expansion of 8.7% in June. July was a third month of expansion for the economy starting with May’s growth of 2.4%. This followed a record contraction of 20.0% in April when the economy was affected by the full lockdown restrictions which were imposed on 23 March and which were not eased until mid-May.

“The ONS observed that the economy is now 18.6% larger than it was at April’s low, although it is still 11.7% below February’s level before COVIS started to really impact on activity.

“The year-on-year contraction in GDP moderated to 11.7% in July from 16.8% in June, 23.3% in May and a peak fall of 25.0% in April.

“The three-month/three-month rate of GDP contraction slowed to 7.6% in July from 20.4% in June.”

Economy benefitted from further easing of restrictions in July

Howard Archer continues: “The economy benefitted in July from the opening up of pubs, restaurants, hairdressers and some other services sectors in England at the beginning of the month. This was followed by a further opening up of services activities mid-month as well as restrictions being lifted elsewhere in the UK.

“This followed the retail sector being allowed to progressively open up through June, which undoubtedly helped to buoy retail sales through July as pent-up demand was released. The services sector also benefitted in July from the progressive re-opening of hospitality businesses from the start of the month.”

All output sectors saw healthy growth in July and improving underlying trends

Howard Archer continues: “It was particularly encouraging to see all output sectors of the economy make strong contributions to growth in July.

“The dominant services sector saw output expand 6.1% month-on-month in July after growth of 7.7% in June, causing the year-on-year decline to slow to 12.4% in July from 17.1% in June, 22.7% in May and 23.8% in April. The three-month/three-month drop in services output slowed to 8.1% in July from 19.9% in June.

“The Office for National Statistics highlighted that 'education grew strongly as some children returned to school, while pubs, campsites and hairdressers all saw notable improvements.’ Education output rose 21.1% month-on-month in July.

“Industrial production rose 5.2% month-on-month in July with manufacturing output climbing 6.3%; this followed respective monthly gains of 9.3% and 11.0% in June. Many manufacturing plants were closed throughout April before starting to re-open from May. The year-on-year decline in industrial production moderated to 7.8% in July from 12.5% in June and 20.0% in May, while it slowed to 9.4% from 14.6% and 23.1% in the manufacturing sector. Additionally, the three-month/three-month decline in industrial production slowed to 3.5% in July from 16.9% in June while for manufacturing output it dipped to 4.4% from 20.2%.

“Completing the healthy expansion across all output sectors in July, production in the construction sector climbed 17.6% month-on-month after rising 23.5% in June. This allowed the year-on-year decline in construction output to slow to 12.7% in July from 24.8% in June and 40.0% in May, while the three-month/three-month contraction moderated to 10.6% in July from 35.0% in June.

“The construction sector has also benefitted from the progressive opening up of sites since May. The housebuilding sector has seen particular improvement, and it is no doubt being helped by the housing market seeing a marked pick-up in activity since restrictions began to be lifted. The housing sector has been further helped by the Chancellor temporarily raising the Stamp Duty threshold from mid-July – although uncertainties remain about the longer-term outlook.”

Economy appeared to continue third quarter bounce in August

Howard Archer adds: “The UK economy’s improvement appears to have continued in August, with activity being supported by stimulus measures, including the Chancellor’s raising of the Stamp Duty threshold for house purchases, the cutting of VAT for the hospitality sector from mid-July, as well as the month-long ‘Eat Out to Help Out’ scheme which saw claims for 100 million meals.

“The purchasing managers surveys indicated a further pick up in services (PMI up to 64-month high of 58.8) and manufacturing activity in August (PMI up to 30-month high of 55.2).  However, there was softer expansion indicated by the August construction PMI after its improvement to a 57-month high in July (down to 54.6 from 58.1).

“Meanwhile, consumers seemingly kept on spending at a robust rate in August with the British Retail Consortium (BRC) reporting retail sales up 3.9% year-on-year, which was the best gain for two years excluding Easter distortions. Additionally, Barclaycard reported consumer spending rose 0.2% y/y, which was the first annual gain since February.”