Friday 9 July 2021 2:11 pm

UK economy grows 0.8 per cent in May

The UK economy expanded in May, but at a much slower pace than in recent months as growth stalled in retail, manufacturing and construction, new figures released today show.

GDP rose 0.8 per cent in May 2021, the fourth consecutive month of growth, according to the ONS.

The expansion was driven by a resurgence in the services industry, which represents a large proportion of the UK economy.

However, economic expansion slowed from March and April’s 2.4 per cent and 2 per cent respective growth figures.

Read more: UK services sector continues recovery amid mounting inflation fears

The accommodation and food service sector grew by rapidly by 37.1 per cent in May, triggered by a burst in consumer spending after restrictions on indoor dining were lifted in the middle of the month.

The success of the UK’s vaccination programme has lifted consumer confidence, prompting people to ramp up spending as concerns over Covid’s lingering impact on the economy eased.

High levels of savings built up during the pandemic also provided households with money to splurge on goods and services that have been unavailable for month due to Covid curbs, analysts said.

Poor output levels in the travel and transport sectors put downward pressure on GDP growth in the services industry as use of public transport stayed low as a result of many people continuing to work from home, the ONS said.

The services industry is estimated to represented 80 per cent of the UK’s total output.

Overall output is now just 3.1 per cent below pre-pandemic levels, up from 3.7 per cent in April.

The growth figures also came in much lower than expected, with economists polled by Reuters predicting a 1.5 per cent uplift to output.

Willem Sels, chief investment officer private banking and wealth management at HSBC, says: “Economic growth was boosted by the gradual further lifting of restrictions, including indoor dining and sporting events.”

“UK services are getting the biggest boost from the reopening, as consumers are eager to get back to normal. The savings ratio has been twice as high than the historical average for 12 months now, and we believe consumers will want to spend some of the savings accumulated during lockdowns” he added.

The Bank of England expects Britain’s economy to grow by 7.25 per cent this year, the fastest rate since 1941.

Consumer spending could expand quickly in the coming months after the final set of Covid restrictions are lifted on 19 July.

Read more: UK construction output growth surges to two decade high

Bottlenecks dampen construction and manufacturing activity

Construction output dipped 0.8 per cent in May, reversing several months of growth.

Shortages of key raw materials involved in the production process of houses and commercial real estate is prompting firms to delay project completions until supply expands and prices fall. Poor weather conditions was also a contributing factor to the fall in output.

Suppliers are struggling to produce raw materials quick enough to allow firms to progress projects. Supply is buckling under the weight of the sudden uptick in construction and manufacturing activity, causing bottle necks to form in the industry, analysts said.

Yael Selfin, chief economist at KPMG UK, says: “Bottlenecks are already starting to emerge across various sectors – from labour shortages to supply chain pressures – as a result of the speed at which many are keen to reopen.”

Clive Docwra, managing director of property and construction consultancy McBains, says: “A continued shortage of materials – in particular cement, electrical components, timber and steel – is in turn fuelling price rises for construction firms and increasing the risk of wider inflationary pressures.”

“With commercial construction work expected to continue to pick up as offices return over the next few months, this materials shortage could also mean a bottleneck in the supply chain that means more projects may be put on hold, putting any revival at risk.”

The construction sector’s poor performance was mirrored in manufacturing, with output dipping 0.1 per cent, the second consecutive month of contraction.

The largest contribution to the fall came from the production of transport equipment, falling 16.5 per cent, driven by car manufacturers being unable to produce products as a result of severe microchip shortages.

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Return to pre-Covid spending patterns could hit some sectors

Experts suggested some sectors of the economy could experience depressed growth rates in the long term as consumers revert to their pre-pandemic spending patterns.

Martin Beck, senior economic advisor to the EY Item Club, says: “The unusual nature of the rebound also points to a slowdown in growth. Lockdowns resulted in a large degree of expenditure switching.”

“But with the economy now largely reopened, spending patterns should return to normal. This will boost demand in some sectors, but spending in other areas which benefited from social distancing restrictions, such as household goods, is likely to fall back.”

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