Delta reality bites as data shows summer economic slowdown

Fresh GDP figures show that economic growth cooled this summer. Hopes that, amid a global pandemic, the UK economy could be switched on and off again, have been well and truly put to bed.

The summer slowdown, shown in the monthly growth rate of 0.1 per cent in July compared to 1 per cent in June, has served as a reminder we’re in for a “bumpy ride”, according to Torsten Bell, chief executive of the Resolution Foundation. In July, the UK economy was still 2.1 per cent smaller than before the pandemic struck, according to the Office for National Statistics.

The Delta variant, the more contagious relative of earlier Covid-19 iterations, has changed the game somewhat over the summer. It made the so-called ‘pingdemic’ more acute as the country opened up but it also brings into question how open the economy can remain throughout the autumn and winter if hospitalisations rise considerably.

Still, it is important to acknowledge that the economy isn’t going backwards and that vaccinations ought to make a different to the pace and nature of any future restrictions. There are strong signals from the labour market by way of job openings, which reached a record high this summer, that certain parts of the economy are strengthening.

But the data is a reminder that the recovery is fragile, and the UK, like other developed economies, is not out of the woods yet.

“Everyone was way too pessimistic in back in autumn last year, they got way too optimistic in the spring and the data is now slowly bringing us back to a more reasonable assessment,” Bell explains. “We’re not in a world where the virus has actually gone away. There’s no such thing as herd immunity in the way that the model hoped there was when we thought the virus was less contagious than it turned out to be.”

There are still serious supply chain bottlenecks, from shortages of certain inputs like semiconductors, to logistics nightmares resulting in shipping containers piling up in the wrong places and labour shortages like those among lorry drivers. The impact has been particularly stark in the construction sector, with ONS figures showing that it had declined for the fourth month in a row in July.

Some problems are more acute in the UK economy, however. There are fresh trade barriers for trading with the EU to contend with. Some of these include things like how much of a product can be sourced from outside of the UK to qualify for tariff-free trade going forward, putting additional pressure on British business’ supply chains.

While there are shortages of HGV drivers and other specialised labour elsewhere, some economists believe that Brexit has made these issues more severe in the UK. New trade barriers with the EU have also been blamed for pushing the UK out of Germany’s top 10 trading partners. Before the Brexit vote, the UK was Germany’s fifth most significant trading partner.

The UK is failing to benefit from the global upswing in trade, according to Gabriella Dickens, senior UK economist at Pantheon Macroeconomics. The UK’s share of global trade shows signs of a sharp decline relative to peers since 2020.

“While Covid can be blamed for some of the continued weakness of services exports, Brexit is the main reason for the underperformance of goods exports,” Dickens says, pointing to sectoral performance versus new trade barriers, such as falls in agricultural exports to the EU.

In terms of the Budget next month, a slowdown in one month’s economic output won’t have a huge impact on the amount of money the chancellor, Rishi Sunak, can look forward to dishing out. Abiding by the spending rules that governments are meant to follow means taking heed of the Office for Budget Responsibility (OBR), which will not be hugely influenced by this data release: previous months showed a sharp uptick in growth.

The most important calculation the OBR will make in terms of Sunak’s potential cash pile will be the amount of scarring – long-term harm – the UK economy will suffer from the pandemic. That’s because it determines the outlook for long-term growth, a key test of the country’s ability to pay back money it has borrowed – namely the sustainability of its debt.

For now, economists are still trying to puzzle out how households will react to a continued bumpy ride going into the winter months: will they spend, will they save, and how many will struggle?

“It’s quite a delicate balance,” says Tomas Hirst, European credit strategist at CreditSights. “We’re seeing a deceleration to headline growth – when you want to get back to a strong, sustainable growth path.” That’s important, Hirst adds, when many of those left on furlough are in particularly Covid-sensitive sectors and need to be absorbed back into the labour market from the end of this month.