‘Pingdemic’ and supply chain chaos dents UK GDP growth

According to a recent report released by the Office for National Statistics, UK GDP grew by just 0.1%, despite the end to all remaining COVID-19 restrictions.

Overall, GDP grew by 3.6% in the three months to July.

The announcement showed that it was the UK economy’s sixth consecutive month of growth – however, it was a lot lower than June, which saw economic growth of 1%.

Although the recovery is still in progress – and with many challenges still ahead – the economy is still 2.1% below its pre-pandemic level.

Jonathan Athow, Deputy Statistician at the ONS, said: “Oil and gas provided the strongest boost, having partially bounced back after summer maintenance. Car production also continued to recover from recent component shortages.”

The blame for the fall in economic growth has been put down to ongoing supply chain issues that have blighted the UK in recent months, as well as the ‘pingdemic’ – meaning many UK employees were unable to continue working due to being forced into insolation.

Ed Monk, Associate Director at Fidelity International, commented: “The recovery in the UK economy has stalled. Growth of just 0.1% in July marks a significant slowdown and it’s a concern that most areas of the economy were flat across the month – only production showed a positive reading while services and manufacturing were flat, and construction fell. It now looks like the wait for the UK to regain the ground lost since the start of the pandemic will last well into next year.

“What’s concerning is that these numbers may not yet be showing the full effect of sustained supply-chain bottlenecks. The problem spans multiple sectors, with concerns growing over shortages in manufacturing and construction materials, as prices of concrete, aluminium, steel, timber, and fuel continue to rise. Speaking to MPs on the commons Treasury committee this week, Andrew Bailey confirmed supply-chain issues and a shortage of workers could see a ‘levelling off of the recovery’.

“These issues are likely to be addressed as part of the Treasury’s spending review and Budget announcement next month. Failure to adequately address these issues risks undoing much of its hard work over the course of the pandemic.”

UK output dramatically slowed in July raising fears of stagflation amid inflation concerns

Following the announcement from ONS, Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown spoke to Business Leader about the impact of the 0.1% growth in the economy.

With the wild horses of recruitment difficulties, product shortages and spikes in infection rates running loose, it’s little surprise they dragged back UK economic recovery in July. Amid mounting supply chain issues and the pressure of isolating workers due the pingdemic, growth in output slowed sharply with GDP coming in at 0.1% compared to the strong 1% rebound in June. It may still be the 6th consecutive month of growth, but only just, with the recovery clearly plateauing and GDP stuck 2.1% below its pre-pandemic level. This reading on the health of the economy is significantly worse than expected and a particular worry is that many of the supply chain issues have exacerbated since July, with companies in industries right across the board warning of problems.

If fewer cars roll off production lines, if drivers aren’t available to deliver goods and if shelves go bare, then the only way for output to go is down.This was already playing out with a 0.3% contraction in consumer facing services in July, the first drop since January because of a 2.5% fall in retail sales. Construction was a particular weak spot, contracting for the fourth month in a row, with output down 1.6%. Even the 9% growth in output in the arts, entertainment and recreation sector thanks to the easing of social distancing rules from 19th July wasn’t enough to gee up the recovery.

As festival season draws to an end and the novelty of partying fades as Autumn approaches, this sector is unlikely to keep pushing up overall GDP number. Production output coming in at 1.2% was the main driver of growth but that too seems to be down to a one off effect from the reopening of an oil field production site, which had been temporarily closed. The ongoing struggle to hire staff isn’t going away any time soon, with post Brexit rules making hiring many workers from Europe difficult.

These are not just temporary bottle necks with a skills gap looming for so many industries, driving up staff wages and inflation.The end of furlough may also make the situation even messier, with workers ejected from positions, but not having the right experience to fill the vacancies on offer. All this raises the unpalatable possibility that stagflation could take hold, where there is a drag on economic growth and knock on higher unemployment, amid the headache of rising prices.

The impact on scale-up businesses

Commenting on UK GDP climbing just 0.1% in July, Ian Warwick, Managing Partner at Deepbridge Capital, said: “Today’s GDP data shows a slowdown in the UK’s positive growth for the economy, and it is therefore more important than ever that scale-up businesses, particularly in high-growth sectors such as digital technologies and life sciences are supported. They will be at the very heart of economic growth as we create an economy fit for the twenty-first century.

“Government initiatives such as the Enterprise Investment Scheme (EIS) have never been more important for helping entrepreneurs and innovators source the funding they require, whilst also offering private investors with tax incentives to develop UK-supporting private equity portfolios. With our EIS funds reaching record levels of funding in 2020/21 it is evident that there is considerable demand from investors and financial advisers alike to invest in early-stage UK companies which we believe will be at the forefront of our economic recovery.”

British Chambers of Commerce Economic Forecast

Findings from the British Chambers of Commerce Economic Forecast released last week predict a 7.1% GDP growth for 2021, the strongest growth since official records began in 1949.

Tony Russell, Chief Growth Officer at Proteus, comments: “While the British Chambers of Commerce’s latest economic forecast is certainly cause for optimism, it’s unlikely to be plain sailing from here on in for British businesses.

“With business investment forecasted to decline by 2.5% this year, supply chain disruption and skills shortages are already having a negative impact on manufacturing industry outputs, and the imminent withdrawal of the Government’s furlough scheme as well as a proposed hike to National Insurance risk blowing business’ fragile recovery further off course in the months to come.

“The truth is change is becoming the mainstay of business life in the post-pandemic world. Faced with such uncertainty, it’s businesses who can meet the challenge head on and adapt that will flourish.  Prudent businesses will arm themselves with data-driven insights and contingency plans to anticipate any organisational challenges, the others will be left behind.”

enewsletter