- A 0.4% month-on-month (m/m) rise in GDP in August was a welcome improvement on the previous month’s small contraction, which was revised down. The August rise left the economy only 0.8% short of its pre-pandemic size. However, the economy faces headwinds which will make the remaining shortfall harder to make up.
- Higher inflation and benefit cuts are squeezing spending power. And supply-side disruption will take time to be resolved. But strong household balance sheets and a healthy jobs market mean the recovery is not out of fuel yet.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“The EY ITEM Club had previously thought that negligible GDP growth in July – which was revised down to a 0.1% month-on-month fall in today’s release – probably reflected short-term factors. These include disruption from a rising number of COVID-19 cases, people being contacted to self-isolate, and the consequent drag on social consumption, such as eating out. These obstacles eased in August which likely aided growth recovering to 0.4% month-on-month.
“This left the economy 0.8% below its pre-COVID-19 size. Services output rose 0.3% month-on-month, although expansion here was held back by fewer GP visits and a fall in Covid testing and vaccinations. Aided by a rise in mining output as oil and gas fields came back on stream following routine maintenance, industry grew 0.8% month-on-month. But construction output fell 0.2% month-on-month.
“The questions is: could August’s more robust performance prove a false dawn? 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. And continued supply-side disruption and the narrative around shortages, whether real or not, will hold back activity and sentiment. But against this, the financial position of households, with around £170bn in ‘excess’ savings accumulated during the pandemic, is strong. Credit conditions remain easy and demand for workers is such that, as the latest numbers demonstrated, the labour market is coming out of the crisis in a remarkably little-damaged state. So, while growth will likely slow over the rest of this year and into 2022, the expansion should prove to be down, but not out.”