UK economy falters after COVID recovery in August, economists predict more struggles

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October 9, 2020 1:16 PM

Gross domestic product rose by 2.1% from July, its slowest month-on-month increase since the UK economy began its recovery in May after a record slump.

UK, UK Economy, World Economy, Slowdown, coronavirus, GDPMore than half of the economic growth in August came from the accommodation and food sector, where output surged by 71.4%. (Reuters photo)

Britain’s economy grew much more slowly than expected in August, setting back its recovery from the coronavirus lockdown, with much of what growth there was down to a one-off government restaurant subsidy programme, official data showed on Friday. Gross domestic product rose by 2.1% from July, its slowest month-on-month increase since the economy began its recovery in May after a record slump, and not even half the median forecast of 4.6% in a Reuters poll of economists.

“While the latest data confirms a rebound in economic activity continued into August, the sharp slowdown in growth indicates that the recovery may be running out of steam, with output still well below pre-crisis levels,” Suren Thiru, head of economics at the British Chambers of Commerce said. “The increase in activity in August largely reflects a temporary boost from the economy reopening and government stimulus, including the Eat Out to Help Out Scheme, rather than proof of a sustained ‘V’-shaped recovery.” More than half of the economic growth in August came from the accommodation and food sector, where output surged by 71.4%, boosted by the Eat Out to Help Out scheme to subsidise meals and easing lockdown restrictions, the ONS said.

Sterling weakened against the U.S. dollar and the euro after the data was released. The economy – which shrank by more than any other Group of Seven nation in the April-June period – remained 9.2% smaller than its level just before the pandemic hit Britain, the Office for National Statistics said. “The economy continued to recover in August but by less than in recent months,” said ONS deputy national statistician for economic statistics Jonathan Athow.

The dominant services sector grew by 2.4% from July, a lot slower than expectations for growth of 5.0%. Growth in the smaller manufacturing and construction sectors also fell short of forecasts. Economists have warned that the British economy may struggle to grow in the months ahead as the number of COVID-19 cases began to rise in September and the government responded by tightening its restrictions on people gathering together.

Bank of England Governor Andrew Bailey said on Thursday that risks to Britain’s economy were “very much on the downside” and the central bank was ready to use its policy firepower to limit the impact of a second wave of COVID cases. The BoE is widely expected to increase its bond-buying programme in November in its next move to pump more stimulus into the economy. Britain is also facing the risk that it fails to secure a trade deal with the European Union with negotiations still ongoing ahead of the Dec. 31 expiry of the country’s post-Brexit transition period.

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