The UK economy’s swift recovery has slowed somewhat recently as Covid-19 cases have risen. The overall outlook remains fairly positive but is clouded by increased uncertainty related to the pandemic.

This Insight looks at the latest developments in the economy, covering data released over the past month.

GDP growth in May was weaker than expected

The economy bounced back strongly from the early 2021 lockdown. Monthly GDP growth of at least 2% in March and April was robust, as pandemic-related restrictions were relaxed.

However, while May’s monthly GDP growth of 0.8% in ‘normal’ times would be considered exceptional, it was below most economists’ expectations. The reopening of indoor hospitality provided a boost, but disruption to car production (due to global microchip shortages) held back output in the manufacturing sector.

Overall, the economy was still around 3% smaller in May 2021 than it was before the pandemic in February 2020.

GDP has been recovering from a fall during the early 2021 lockdown, with strong gains in March and April. GDP growth slowed in May 2021. GDP in May 2021 was 3% below the pre-pandemic level of February 2020

Rising infections and isolation dampen economic activity

As the latest GDP data available is for May, it predates the rise in infections seen over the past two months. Economic indicators covering a more recent period show that the initial growth momentum from when restrictions were first eased has now faded.

For instance, up-to-date weekly estimates of consumer spending from card payments indicates spending broadly stagnated from May to mid-July. These figures can be volatile, and may not be representative of all consumer spending, but suggest more subdued demand from consumers in recent weeks.

A leading indicator of business activity, the IHS Markit Purchasing Managers’ Index, indicated a slowdown in the recovery in July and was weaker than economists had been expecting. Many firms that were surveyed reported staff shortages and disruption to supply chains.

A chart shows that The value of purchases recorded by debit and credit cards has trended lower in the last few months following a big rise earlier in the year.

Estimating the economic impact from the rise in the number of people having to self-isolate is difficult. Even if the overall impact to the economy may not be very large at this stage, some sectors, such as food supply, are particularly affected. Overall economic uncertainty has increased and, as the card payments data seems to indicate, consumers may have become more cautious.

Labour market improvement continues

There have also been more positive recent developments.

Latest figures show that the labour market has continued to improve, with employment rising and unemployment falling. Job vacancies are also above pre-pandemic levels. Consumer confidence has reached its highest level since the pandemic began.

In addition, if some of the additional savings that some households have accumulated during the pandemic – possibly as high as £200 billion in total – is spent, this will support economic growth.

The average forecast among economists is for GDP growth of around 7% for 2021 as a whole, with expectations raised in recent months following the unexpected strength of the initial recovery phase.

Where the economy goes from here though is, as ever, tied closely to the path of the pandemic and how government, consumers and businesses react to developments.

Further reading

Economic Indicators, House of Commons Library, July 2021.

The UK economy: A dashboard, House of Commons Library.

About the author: Daniel Harari is a researcher at the House of Commons Library, specialising in UK and international economies.

Photo: Leeds, UK by Jonny Gios on Unsplash, cropped

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