U.K. Recovery Runs Into Trouble as August Growth Disappoints

Meghann Showers

(Bloomberg) — The U.K.’s economic recovery slowed dramatically in August, throwing the strength of the nation’s rebound into doubt as coronavirus infections mount going into the final few months of the year. Gross domestic product rose 2.1% in the month, less than half the pace forecast by economists and down […]

(Bloomberg) — The U.K.’s economic recovery slowed dramatically in August, throwing the strength of the nation’s rebound into doubt as coronavirus infections mount going into the final few months of the year.

Gross domestic product rose 2.1% in the month, less than half the pace forecast by economists and down from 6.4% in July. The slowdown came despite the government stepping up efforts to revive the beleaguered hospitality industry.

It’s another sign that Britain risks lagging behind its biggest European peers. Output is now languishing almost 10% lower than before the lockdown, compared with around 5% in France. The U.K. had the biggest contraction among major European economies in the second quarter, as well as one of the world’s worst death rates from the virus.



graphical user interface, chart: The U.K. economy grew at less than half the pace anticipated in August


© Bloomberg
The U.K. economy grew at less than half the pace anticipated in August

The figures will come as a concern to officials, since August was when virus curbs on activity were at their lowest and government support for the hospitality industry peaked. The pound briefly slid from the day’s high after the report. Bond yields dipped slightly.

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Swathes of the country are now back under restrictions as cases of coronavirus surge, and with the economy facing multiple other threats, making up the remaining shortfall may prove to be a slog. Policy makers say they’ll increase monetary and fiscal stimulus as needed.

“With recent surveys pointing to activity softening in September, and the potential for further and more stringent localized restrictions on activity, doubt is growing as to whether the recovery can be sustained into the final quarter of the year,” said Dean Turner, economist at UBS Global Wealth Management. “Sluggish progress is likely to encourage the Bank of England to increase its bond-buying program at its November meeting.”

What Bloomberg’s Economists Say

“The U.K. economy experienced a sharper-than-expected slowdown in growth in August. With the outlook having darkened significantly in recent weeks, we expect the Bank of England to ease again before the end of the year by increasing its asset purchase target by 100 billion pounds in November.”

-Dan Hanson. Read his U.K. REACT

Meanwhile companies face tariffs, costs and border disruptions from Jan. 1 unless Britain and the European Union clinch a Brexit trade deal soon. Few think that Chancellor Rishi Sunak’s wage-subsidy replacement announced last month will avert mass job losses as government support is scaled back.

Sunak will announce on Friday a new job support program to help businesses forced to close under new coronavirus restrictions that are likely to be imposed within days. The plans are likely to include paying two-thirds of the wages of workers in companies affected by new rules, which could include shutting bars and restaurants in coronavirus hotspots in England.

That could derail the economy’s recovery from its 20% contraction in the second quarter, the most among major advanced nations. While signs are the economy posted strong growth in the third quarter, GDP will still be around 3% below its pre-pandemic level at the start of 2022 if private-sector forecasters are correct.



chart, line chart: Long Haul


© Bloomberg
Long Haul

In August alone, the figures make for disappointing reading. While a Treasury-subsidized meals program and a value-added tax cut brought some relief to restaurants, pubs, cafes and hotels, contributing over half the growth in August, the dominant services sector still grew slower than economists expected. Manufacturing and construction showed only a modest expansion.

(Updates with more detail from second paragraph)

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