Thursday 12 August 2021 1:19 pm

UK GDP soars in second quarter as Covid unlocking turbo-charges economy

The burst in consumer spending triggered by the gradual lifting of Covid prevention measures in April and May boosted the UK economy in the second quarter, according to fresh official data released today.

Figures from the Office for National Statistics reveal the UK economy grew 4.8 per cent in the second quarter of this year, with a strong performance from the services industry turbo-charging the economy’s recovery from the damage inflicted on it by the Covid crisis.

The rise in output means GDP is now 4.4 per cent below where it was in the last quarter of 2019, before the onset of Covid in the UK.

Despite growth smashing historic levels, the rate fell short of the Bank of England’s prediction that GDP would expand by more than five per cent in the second quarter.

The largest contributor to output growth was the accommodation and food services sector, surging 87.8 per cent, driven by consumers filling out pubs and bars to watch England progress through Euro 2020 in June.

Food and beverage services output was also up by more than 10 per cent.

Jonathan Athow, deputy national statistician for economic statistics at the ONS, said: “The UK economy has continued to rebound strongly, with hospitality benefiting from the first full month of indoor dining.”

The rapid rollout of Covid vaccines across the UK throughout the second quarter reduced the dangers of catching coronavirus, enabling policymakers to lift restrictions on sectors of the economy that rely on social and face-to-face contact to generate income.

As a result, output in the services industry, which represents around 80 per cent of the UK economy, has risen sharply as consumers have flocked to pubs, bars, restaurants and high streets to capitalise on their newfound freedoms.

The ONS said the UK’s GDP growth for the second quarter was faster than those recorded by the US, France, Germany, and Spain. The UK recorded the fastest quarterly growth rate among all G7 nations.

Chancellor Rishi Sunak said: “Today’s figures show that our economy is on the mend, showing strong signs of recovery.”

“I know there are still challenges to overcome, but I feel confident in the strength of the UK economy and the resilience of the British people.”

The monthly growth rate in June came in higher than experts’ exepctations, with the economy expanding one per cent compared to a revised down figure of 0.6 per cent in May.

Over the last month, the services industry grew 1.5 per cent.

The pound lost ground on the greenback despite the upbeat economic data, weakening 0.14 per cent against the dollar to buy $1.38.48, in part reversing three successive days of gains.

Investors reacted negatively to the news. London’s FTSE 100 dropped 0.15 per cent to 7,209 points during afternoon trading, possibly driven by a weaker pound weighing on export-focused blue-chips.

Recovery remains ‘fragile’

Experts have warned that signs are emerging showing the economic recovery from the Covid crisis is at risk of slowing as a result of severe supply chain pressures.

Yael Selfin, chief economist at KPMG UK, said: “There are signs that ongoing issues with supply chains and staff shortages are slowing the pace of recovery, causing momentum to halt prematurely before the economy reaches pre-Covid levels.”

Businesses have struggled to secure key resources used to produce goods and services amid widespread scarcity of inputs caused by supply chains buckling under the weight of resurging global demand as economies emerge from Covid restrictions.

Worker shortages have been exacerbated by the NHS Covid-19 app “pinging” people to instruct them to self-isolate after coming into contact with someone who tested positive for Covid.

These headwinds are fuelling fears that inflation could continue to surge if firms pass on higher costs to protect margins and if they need to increase wages to attract workers.

“There is a growing risk that a slowing pace of output growth could coincide with even higher levels of consumer demand in the short term, leading to an unwelcome burst of inflation,” Selfin added.

Although construction output also grew in the second quarter, a growing number of businesses are now reporting limited availability of products like timber, steel, cement and tiles.

Meanwhile, buisness investment remained lacklustre in the second quarter, rising 2.4 per cent, indicating firms are pushing back big ticket purchases until they have greater clarity over the trajectory of Covid cases.

Thomas Pugh, UK economist at RSM, warned that depressed business invesmtent levels could leave the UK economy exposed to long-term scarring after the pandemic recedes.

“Lacklustre business investment is a key indicator of how much long-term economic damage there will be from the pandemic, so we will be watching this closely for any signs of permanently lower investment,” he said.

Where is the economy headed?

Economist have differing expectations on where the UK economy is likely to head over the course of the second half of the year.

ING analysts are sceptical about whether the recovery will progress at a similar clip.

“In practice, we think the July and August GDP readings will average at roughly 0.2-0.3%, which translates into overall third-quarter growth in the region of 1.5% – quite a bit lower than the 3% figure the Bank of England is pencilling in,” said James Smith, ING developed markets economist.

However, Deloitte’s chief economist, Ian Stewart, thinks economic output is likely to pass its pre-pandemic peak by the end of the year.

“The pace of repair in the UK economy has been extraordinarily fast. It took five years for the economy to recover output lost in the financial crisis. The damage caused by the pandemic has been far worse and the recovery far quicker”, he said.

“Massive government support has helped preserve capacity and speed up the rebound. This experience will strengthen the hands of those who believe that government – and public spending – should take a far more active role in countering conventional recessions.”

The EY Item Club said that it expected GDP to grow by an above-consensus 7.6 per cent in 2021, despite a potential slowdown in growth in the second half of the year.

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