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UK economy continues slow recovery

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Written by:
09/07/2021
The UK’s gross domestic product (GDP) crept up for the fourth consecutive month in May, with an estimated rise of 0.8%, prompting a mixed reaction from economists.

GDP measures the value of goods and services produced in the UK and estimates the size of and growth in the economy. The fact that GDP is rising is a positive indicator for the economy, but growth remains well below the pre-coronavirus (COVID-19) pandemic level of 3.1% recorded in February 2020.

The figures indicate a mixed picture in different market sectors. Activity in the accommodation and food service markets increased strongly by 37.1% in May as Covid restrictions eased, feeding through to overall growth in the sector of 0.9%, and the production sector returned to growth of 0.8% thanks to the inclement weather pushing up our use of electricity and gas. But output in the manufacture of transport equipment fell by 16.5%, its largest fall since April 2020, as microchip shortages disrupted car production. The construction sector also shrank for a second consecutive month in May 2021, by 0.8%, due to the wet weather and material shortages, but remains 0.3% above its pre-pandemic level in February 2020.

Reasons to be cheerful

Some economists greeted the figures with cautious optimism. Julian Jessop, economics fellow at free market think tank the Institute of Economic Affairs, said:

“The 0.8 per cent increase in GDP in May was slightly disappointing and means that the UK economy was still 3.1 per cent smaller than the pre-Covid level seen in February 2020, despite a bounce in the hospitality and leisure sectors as more restrictions were eased.

“However, one month’s data is not enough to change the big picture. Activity is still likely to recover to pre-Covid levels in the third quarter of the year.

“The main misses in May were in construction and retail, both of which will have suffered from the wet weather. The more timely June surveys for both sectors are reassuring, with the construction PMI and the CBI Distributive Trades surveys each hitting new highs.

“In the meantime, consumer and business confidence have continued to recover, the labour market is buoyant, and pipeline inflation pressures are still rising. Policy-makers should therefore still scale back support that now risks doing more harm than good, including the Treasury’s furlough scheme and the Bank of England’s money printing.”

Gloom in the boom

Paul Craig, Portfolio Manager at Quilter Investors, warned that there is still some gloom in the boom:.

“There’s a danger that the ‘booming’ consumer-facing services sector masks trouble elsewhere. Manufacturing output is flatlining after two consecutive months of modest contractions. Transport equipment fell 16.5% as a result of semi-conductor shortages holding back car production. Construction output is down for another month, no doubt hampered by cement and aggregate shortages, although output has recovered above pre-pandemic levels.

“And then there’s the risk of variants. Things still could turn on a sixpence and all we hear about in the press is the rising case numbers and how things will play out once ‘freedom day’ is upon us. We are throwing caution to the wind and nobody knows how consumers will react. The surging case numbers and lack of mask wearing may well just encourage them to stay at home, out of choice this time around. Only time will tell.”

 

 

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