The August growth figures for the UK were a shock, and not in a good way.
All the ingredients seemed to be in place for another month of rapid recovery from the spring slump induced by lockdown. The number of Covid-19 cases was low, no new restrictions were put in place and the public seemed eager to spend the savings accumulated earlier in the year.
What’s more, Rishi Sunak’s July mini budget was a deliberate attempt to boost activity, not just through the “eat out to help out” scheme, but via temporary cuts in VAT and stamp duty on home purchases.
So while in normal times a 2.1% monthly increase in output would be considered spectacularly good, in the context of August 2020 it was a considerable disappointment. The economy expanded at about a third of the 6.4% it managed in July, and undershot economists’ 4.6% consensus forecast by a wide margin.
In the absence of eat out to help out, which boosted activity in the hospitality sector by more than 70% month on month, the picture in August would have been even worse. Higher spending on food and accommodation accounted for more than half of the economy’s growth.
The good news, such as it is, is that two-thirds of the ground lost between February and April has been made up in the subsequent four months. The bad news is that the economy is still more than 9% below its February level, and at the current rate of progress it will take another two years to return to pre-crisis levels of output. And that assumes no further setbacks along the way, something only an incurable optimist would rule out.
Indeed, there are already indications from the most timely pieces of data – such as for restaurant bookings and travel – that growth may now have stalled. Fresh national and local restrictions have been imposed since August and these will inevitably have an impact on the economy.
So what does all that mean? It means there is no chance of a V-shaped recovery. It means an extremely hard winter of rising company failures and job losses lies ahead. And it means the chancellor will have to forget about how much he is borrowing and act swiftly, starting with support for businesses at the sharp end of local lockdowns, to prevent an economic catastrophe in the months to come.
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