The UK economy falters – crushing hopes for a sharp recovery

Written by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

The UK’s economic rebound since the end of lockdown has faltered, with momentum slowing sharply in August, crushing hopes for a sustained recovery from the coronavirus crisis.

GDP rose by just 2.1%, less than half of the growth forecast, following more robust levels of growth of 6.6% in July and 8.7% in June: it remains 9.2% below the February 2020 level.

This was despite a huge 71.4% upswing of for the hospitality industry in August as the Eat Out to Help Out scheme lured customers back into restaurants and international travel restrictions boosted domestic ‘staycations’.

Most other sectors of the economy languished, with manufacturing rising by just 0.7% and car and aircraft production still much lower than the start of the year. Construction rose by 3% but remains 10.8% lower than in February.

This trend does not bode well for the coming months, given that fresh restrictions have been imposed across the hospitality industry, with venues forced to close at 10pm and local lockdowns being rolled out, suggesting the sector will not act as a prop for the wider economy. Other government data on the social impacts of the coronavirus showed that levels of socialising, eating out and travel have begun to fall after increasing during the summer.

These are initial estimates and could be subject to revision, but the GDP numbers indicates that far from a sharp, V-shaped recovery from the 20.4% contraction in the second quarter of 2020, we should expect a very bumpy road head, with even a W-shaped path looking more possible.

The unwinding of the furlough scheme, with the replacement job support scheme only supporting employees who can be kept on part-time, is expected to lead to further mass redundancies. That could have a downward spiralling effect on consumer demand as worries also ramp up about the risks of a no-deal Brexit and the effect that could have on the depressed economy.