Rebound in growth unlikely to be sustained

The rebound in monthly GDP growth to 0.4% m/m in August (consensus 0.5%) after the dismal 0.1% m/m contraction in July, leaves the economy 0.8% below its pre-pandemic level. The smaller hole in the economy increases the risk that the Monetary Policy Committee (MPC) will raise interest rates later this year. However, the MPC cares more about quarterly GDP – where the hole is bigger – and all the early indicators suggest that the economy lost some momentum in September as shortages and surging energy prices hindered growth. We think the MPC will wait to see how the end of the furlough scheme in September has hit the labour market before raising rates. This makes a hike in May 2022 more likely than one later this year.


The rebound in growth was primarily driven by consumer-facing sectors. Output in the accommodation and food services sector jumped by 10.3% m/m as consumers started to venture out again after July’s ‘pingdemic’, which at one point had more than a million people self-isolating. As a result, the accommodation and food sector rose past its pre-pandemic level for the first time. (Insert Chart) The arts and recreation sector also got a boost, rising by 8.5% m/m.

However, this was partially offset by the retail sector’s fourth consecutive monthly contraction. The recent weakness in retail sales could partly be due to consumers switching back to spending on services after they were forced to spend on goods during the pandemic lockdowns, though there’s also some evidence that consumers are becoming less confident about spending in the face of rising taxes and utility bills.

Elsewhere, the construction industry contracted by 0.2% m/m. The unseasonably wet weather in August probably accounts for some of this, but materials shortages almost certainly played a part as well.

The good news was that output in the industrial sector grew by 0.8% m/m. This was driven by a 16.0% m/m jump in oil and gas production after outages at oil platforms earlier this year. And output in the manufacturing sector grew by 0.5% m/m after falling by 0.6% m/m in July. This was largely because of a rebound in motor vehicle manufacture as supply issues continued to ease.

The early signals suggest that growth stagnated again last month. We’ve therefore pencilled in growth of 1.3% q/q in Q3, which is well below the 2.1% the MPC expected in September. What’s more, there is a risk that growth in the fourth quarter is just 1.0% due to shortages of labour and materials, affordable energy, and the removal of fiscal support. If that’s the case, GDP may not get back to its pre-crisis level until next year.