July’s sharp slowdown in UK GDP growth highlighted the supply- and demand-side challenges to the recovery. Supply chain disruption continues to be widespread and staff shortages remain an issue. Meanwhile, the largest tax shake-up in a decade is aimed at solving short- (Covid) and long-term (social care and ageing) funding challenges.
Supply-side bottlenecks and ongoing struggles to fill vacancies are staging to drag on the recovery. And as we learned through July, rising caseloads can quickly turn consumers cautious. An upsurge in cases as schools return (and evidence of falling vaccine efficacy as time elapses) might conspire to be the next ‘bumpy’ part of the recovery.
The UK economy proved its resilience yet again. June GDP figure surprised on the upside despite disruptions caused by the third wave. Granted, there’s still some way to track back and July looks to have been more of a struggle. But the UK is well placed to chase down the pre-Covid level of economic output in the coming months.
Last week, the Bank of England decided to shake things up a little. While monetary policy was left unchanged in August, the meeting was significant as the Bank made notable changes to its outlook for both inflation and the labour market. The ‘Old Lady’ also gave new guidance on how it plans to wind down its largest ever QE programme.
Tis the season of Q2 growth figures. China’s growth picked up, albeit with signs of sluggishness. The US surpassed its pre-pandemic levels despite growth falling short of market expectations. The Euro area embarked on its road to recovery but below its pre-pandemic levels. So all eyes on UK GDP next week, amid signs of greater consumer caution plus a ‘pingdemic’ led slowdown in June.
The recent jump in inflation and pockets of tight labour market conditions prompted two members of the Monetary Policy Committee (MPC) to indicate an earlier than anticipated tightening of policy. But with signs of softer activity three MPC members took a more ‘dovish’ stance. Looks like the Bank won’t break ranks with the Fed & ECB just yet.
Freedom Day in England – a much awaited milestone. Consumer behaviour, rather than restrictions, is in the driving seat now when it comes to gauging the recovery. But with daily cases surpassing January levels and a “ping-demic”, spending appetite might just be a little dented in the near-term. For now, the data continues to look robust.
While the data on economic activity continue to look positive, the overall mood is that of cautious optimism. Cases are on the rise in various parts of the world. In the UK the wall of vaccines is so far proving effective against a rapidly building third wave.
After bumper readings in April and May, activity indicators are levelling off in the UK. Covid 19 cases have continued to pick up, with some hints that consumers have turned a little more cautious in response. But firms remain optimistic, indicating they want to keep hiring. Meanwhile, despite the chatter on inflation, the Bank of England remain firmly of the view that it will prove temporary or ‘transitory’. So no monetary tightening coming any time soon.
Following a strong rebound in economic activity, last week saw a slight pullback across macro indicators. While the public health experts in the UK are warning about future lockdowns, especially during the winter months, and PM Johnson confirmed the delay in full reopening by four weeks, there remains no obvious signs of consumer concerns yet.
