UK economic growth slows as supply problems hit the recovery

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UK economic growth slowed between July and September as supply chain problems hindered the recovery, latest official figures show.

The Office for National Statistics said consumer spending increased as Britain continued to emerge from lockdown.

But that was offset by falls in other areas of the economy, leaving growth for the three months of 1.3%.

It means the economy is 2.1% smaller than in the final three months of 2019, before the coronavirus pandemic hit.

Grant Fitzner, ONS chief economist, said service growth expanded, helped by house buyers rushing to do deals before the end of the stamp duty holiday.

“However, these were partially offset by falls in both the manufacture and sale of cars.

“Notably, business investment remained well down on pre-pandemic levels in the three months to September,” he said.

GDP graphic

Growth slowed significantly from a 5.5% rise recorded between April and June when many Covid restrictions were lifted.

The ONS said that the UK expanded by less than it initially thought in July and August, leading them to revise down growth figures for both months.

“What happened earlier in July and August was that we had the pingdemic.” said Sarah Hewin, head of research for Europe and the Americas at Standard Chartered. “And that ended up essentially holding the economy flat.”

In contrast, the economy grew by 0.6% during September.

Chancellor Rishi Sunak said the latest figures showed his economic policies were working.

“The economy continues to recover from Covid and thanks to schemes like furlough, the unemployment rate has fallen for eight months in a row and we’re forecast to have the fastest growth in the G7 this year,” he said.

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Kirsty Davies-Chinnok

‘Three price increases’

Kirsty Davies-Chinnok, from Professional Polishing Services (PPS), told the BBC that the company, which polishes metals such as stainless steel and aluminium, had been “very busy” throughout 2021 so far.

“We have had some bespoke projects, but we have seen general work has increased,” she said.

The managing director said the manufacturing industry “didn’t really stop through most of 2020 and it has continued to increase”.

It has led to PPS deciding to invest further in its operations despite initially thinking it was “too risky” due to the pandemic, Ms Davies-Chinnok added.

However, rising material and supply costs had led to the firm increasing its prices to customers.

“We have had three price increases this year, which is unheard of,” said Ms Davies-Chinnok. “But we can’t finance doing business with our customers when our suppliers are increasing their costs to us.”

She added that PPS, which is very energy intensive business, was “incredibly lucky” by the fact it had renewed its energy contracts last December, before wholesale gas prices surged worldwide.

Longer term, Ms Davies-Chinnok said the biggest threat to her sector “has to be climate change” and said industry and government had to look at ways to make greener energy.

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Business leaders expressed caution about the outlook, with Suren Thiru, head of economics at the British Chambers of Commerce, saying the data points to the UK economy “only likely to return to its pre-pandemic level next year, behind many of our international competitors”.

“Although monthly output rebounded through the quarter from July’s contraction this is more likely to reflect a temporary boost from restrictions easing, rather than a meaningful improvement in the UK’s underlying growth trajectory,” he said.

The ONS highlighted the impact of supply chain problems, which businesses have been struggling with for several months as they adjust to labour shortages and disruption at container ports.

Stocks held by manufacturers fell during the July-to-September quarter, the ONS said. And a slowdown in new UK car sales was in large part due to a global shortage of microchips. The ONS also noted that retailers were reporting “lower than usual” stock for the time of year.

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Navigating headwinds

Analysis box by Faisal Islam, economics editor

As expected, the UK economic rebound from the coronavirus restrictions slowed in the third quarter of the year between July and September.

The fact that this was a little lower than expected, and lower than other G7 European economies, reinforces some concerns about the strength of the recovery in the face of supply chain challenges and consumer weakness.

The economy has still not caught up with its losses during the pandemic. On a quarterly basis, the gap is still 2.1% and will not be filled until into next year. Using monthly data, it is smaller.

The good news is that the service sector has now almost made up its pandemic losses, reflecting the success of the vaccine programme in reopening the economy.

The challenge now is in navigating some global and local headwinds, while the Bank of England will be starting to raise rates, and taxes and energy bills are heading up.

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‘Shortages remain an issue’

The latest growth figures were weaker than many economists had expected, and Paul Dales, chief UK economist at Capital Economics, said the data suggested “the best of the recovery is now behind us”.

“We think progress is going to slow over the next six to nine months as shortages remain an issue and the real spending power of businesses and households is reduced by higher taxes and rising utility prices,” he added.

The economic slowdown comes after the Bank of England held off from raising interest rates last week despite rising inflation.

It wanted to see how the jobs market and wider economy was holding up after the end of furlough support.

The Bank had already said it expected growth to slow to 1.5% in the July-to-September quarter and forecasts it will pull back further to 1% in the final three months of 2021.

Mr Dales said the slower growth probably would not stop the Bank raising interest rates slightly in December, but could limit further rises next year.

Separately, Britain’s trade deficit in goods widened by £9bn in the third quarter to £42.3bn, the ONS said, driven by rising imports from EU and non-EU countries as exports fell – especially to non-EU countries.

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