Press release

9 Oct 2020 London, GB

UK GDP growth below expectations but UK economy still likely saw strong bounce back in Q3 – EY ITEM Club comments

The UK economy saw lower growth than expected in August at 2.1% month-on-month but undoubtedly still achieved a strong bounce back in Q3.

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  • The UK economy saw lower growth than expected in August at 2.1% month-on-month but undoubtedly still achieved a strong bounce back in Q3
  • It was always going to be a challenge for the economy to achieve robust monthly GDP gains as recovery progressed from April’s lows. Pent-up demand has been increasingly depleted and the immediate benefits from the opening up of sectors have already been felt. Nevertheless, August’s GDP growth rate of 2.1% was somewhat disappointing
  • The economy is now 21.7% larger than it was in April, although it is still 9.2% below February’s level, when the main economic impact of COVID-19 was still to be felt
  • August’s GDP growth of 2.1% month-on-month was the consequence of expansion across all output sectors. Service sector output led the way (up 2.4% month-on-month) as it benefitted from the ‘Eat Out to Help Out’ scheme and the temporary VAT cut for the hospitality sector. Construction output grew 3.0% month-on-month in August while industrial production gained 0.3% with manufacturing output up 0.7%
  • The EY ITEM Club believes that GDP likely grew around 16-17% quarter-on-quarter in Q3 after contracting 19.8% quarter-on-quarter in Q2
  • The Q3 bounce back was led by consumer spending amid reduced restrictions and housing market activity pick-up. However, business investment remained weak
  • The EY ITEM Club believes that Q4 will be more challenging for the UK economy and growth will be limited. This will be due to a likely significant rise in unemployment, waning pent-up demand, and increased restrictions on activity due to rising COVID-19 cases
  • Additionally, business caution and reluctance to invest in Q4 may be magnified by uncertainties over the future UK-EU trading relationship. There may, however, be some boost to growth in Q4 from significant stockbuilding ahead of the 31 December deadline for UK-EU talks
  • The EY ITEM Club’s full Autumn Economic Forecast will be published on Monday 12 October. Please contact the EY media team for an embargoed copy of the report

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

“The UK economy continued to recover in August, benefitting from reduced lockdown restrictions. Economic activity was further supported in August by the boost to the restaurant sector coming from the ‘Eat Out to Help Out’ scheme, as well as from the hospitality sector’s temporary VAT cut from 20% to 5%.

“Nevertheless, August GDP growth of 2.1% month-on-month was much less than expected (the consensus was for growth around 4.5% month-on-month) and it was the slowest monthly expansion since the economy started growing again in May. GDP had previously seen month-on-month growth of 6.4% in July, 9.1% in June and 2.7% in May. This followed a record contraction of 19.5% in April when the economy was affected by the full lockdown restrictions imposed on 23 March.

“It was always going to be a challenge for the economy to achieve robust monthly GDP gains as recovery progressed from April’s lows. Pent-up demand has been increasingly depleted and the immediate benefits from the opening up of sectors have already been felt.

“Nevertheless, the August GDP performance does look somewhat disappointing.

“The economy is now 21.7% larger than it was at April’s low, although it is still 9.2% below where it was in February, before COVID-19 started to really affect activity.

“The year-on-year contraction in GDP moderated to 9.3% in August from 11.3% in July, 16.4% in June, 23.2% in May and a peak fall of 25.1% in April.

“Significantly, the three-month/three-month rate of GDP moved back into positive territory in August as it expanded by 8.0%. Three-month/three-month GDP had previously been down 6.8% in July after the record fall of 19.8% in June.”

All output sectors saw growth in August

Howard Archer continues: “The services sector grew 2.4% month-on-month in August after expansion of 5.9% in July, but this was expected to be higher due to the support it received from the ‘Eat Out to Help’ Out scheme and the cutting of VAT for the hospitality sector. Indeed, the food and beverage services activity industry grew 69.7%. Additionally, the accommodation sector grew 76% in August as domestic staycations were boosted by international travel restrictions.

“The year-on-year decline in services output slowed to 9.5% in August from 11.7% in July. Services output was up 7.1% on a three-month/three-month basis in August compared to a fall of 7.1% in July.

“Industrial production rose a modest 0.3% month-on-month in August with manufacturing output climbing 0.7%; this followed respective monthly gains of 5.2% and 6.9% in July. Eight out of 13 manufacturing sectors saw growth in output in August. The year-on-year decline in industrial production moderated to 6.4% in August from 7.4% in July, while it slowed to 8.4% from 10.1% in the manufacturing sector. Industrial production was up 9.3% in the three months to August compared to the three months to May, with manufacturing output up by 11.3%. There had been respective falls of 3.0% and 4.8% on a three-month/three-month basis in July.

“The strongest monthly output growth in August occurred in the construction sector where it climbed 3.0% month-on-month after rising 17.2% in July. This allowed the year-on-year decline in construction output to slow to 13.0% in August from 15.6% in July, while the three-month/three-month growth rate switched to +18.5% in August from -11.6% in July.

“The improvement in construction output has been led by housebuilding, which is no doubt being helped by the housing market seeing a marked pick-up in activity in recent months, although uncertainties remain about its longer-term outlook.”

Economy continued to grow in September

Howard Archer adds: “The economy clearly continued to grow in September, with the performance mixed across sectors. While both sectors remained well in expansionary territory in September, the purchasing managers surveys indicated a slowdown in services (PMI down to 56.1 from August’s 64-month high of 58.8) and manufacturing activity in September (PMI down to 54.1 from August’s 30-month high of 55.2).

“However, the construction sector regained some momentum in September after August’s slowdown with the PMI rising back up to 56.8 from 54.6.

“Also on a positive note, the CBI distributive trades survey reported that the balance of retailers reporting a year-on-year rise in sales volumes rose to +11% in September, which was the strongest level since April 2019 and followed a dip to -6% in August from +4% in July. Less encouragingly, Springboard reported that shopper footfall to all retail destinations fell back for a second week running in the week to 3 October after the Government called on people to work at home where possible. Additionally, new car sales saw a 4.4% year-on-year fall in September (a key month due to the number plate change). At 328,041 vehicles, 2020 was the weakest September for new car sales since the introduction of the dual number plate system in 1999.”