UK Economy Grew By 6.6% In July, But Progress To Recovery Already Slowing Down

Britain’s gross domestic product expanded by 6.6% in July as many shops and businesses reopened, however output remained well below pre-COVID-19 levels.

July marked the third straight month of expansion but though "it has continued steadily on the path towards recovery, the U.K. economy still has to make up nearly half of the GDP lost since the start of the pandemic," the Office for National Statistics, or ONS, stated.

U.K. GDP shrank by a record 20.4% in the second quarter of 2020.

As such, the U.K. economy is still 11.7% smaller than it was in February just before the virus outbreak.

“All areas of manufacturing, particularly distillers and car makers, saw improvements [in July], while housebuilding also continued to recover,” ONS’ Director of Economic Statistics Darren Morgan said. “However, both production and construction remain well below previous levels.”

Thomas Pugh, U.K. economist at Capital Economics, cited that the reopening of restaurants and pubs helped the accommodation and food services sector rise “by a whopping 140.8%" between June and July. But overall activity in this key sector of the economy was still 60.1% below levels of February.

"Now that most sectors in the economy are open again there is little scope for further large rises in monthly GDP,” Pugh cautioned.

Pugh further warned that any recovery in the U.K. faces other obstacles.

"Talk of tax rises at the next [government] budget, a further deterioration in the Brexit negotiations and a worrying rise in the number of virus cases and tighter social distancing restrictions will all conspire to slow the recovery even further," he said.

Pugh added: “July was probably the last of the big step-ups in [economic] activity and a full recovery probably won’t be achieved until early 2022, which is why we think the Bank of England will yet expand [quantitative easing] by a further £250 billion [$320 billion] in total.”

Faisal Islam, BBC economics editor, also pointed out that July’s GDP growth was slower than the 8.7% increase reported in June – thereby raising some concerns about the ongoing strength of the bounce back.

“While the third quarter is on course to see a record number for growth and the official end of recession, fears remain that the recovery could peter out,” Islam wrote.

Another concern is that the government’s wage subsidy scheme – whereby employees receive up to 80% of their regular wages – will expire at the end of October.

Former Prime Minister Gordon Brown urged the government to extend or amend the program.

"You have got to send a signal that unemployment matters," he told BBC. "We don't want to destroy any more capacity and skills in the economy."

Dean Turner, an economist at UBS Global Wealth Management, predicts the U.K. economy will not return to pre-pandemic levels until at least the end of next year.

"Even with a managed exit from the Brexit transition agreement, it is unlikely that the lost output would be recovered before the end of next year," he said. "The latest twist in negotiations [with the EU] raises the prospect that any recovery may take longer."