Domestic holiday boom helped UK economy bounce back in August

UK economic growth picked up in August after an unexpected fall in July as bars, restaurants and festivals benefited from the removal of most remaining pandemic restrictions.

The Office for National Statistics (ONS) said gross domestic product rose by 0.4% in August compared with the previous month as consumers increased their spending on leisure during the first full month without Covid controls in England.

However, the ONS cut its growth estimate for July from a monthly rise of 0.1% to a fall of the same amount after fresh economic data revealed a worse hit for car manufacturing caused by global supply chain problems and microchip shortages.

The latest snapshot showed activity in the accommodation and food service sectors, as well as arts, entertainment and recreation, contributed most to growth in the UK’s dominant service sector, which makes up about 80% of the British economy.

Analysts said a rise in holidaying in the UK while international travel restrictions remained in place helped to boost the accommodation sector, which grew by 23%, thanks to strong growth in sales at hotels and campsites.

Air transport continued to expand as restrictions on foreign travel were gradually lifted, taking off by 27.5% in August, although it still remains 75% below its pre-Covid level.

Growth in August was offset by a decline in the health sector amid a drop in testing and vaccinations for Covid-19. Retail sales fell, reflecting shortages on the high street and consumers switching more of their spending from goods to services after the easing of pandemic controls.

Production output – which includes manufacturing, energy and mining – grew by 0.8% amid an increase in crude petroleum and natural gas output after recent temporary maintenance closures at an oilfield.

Challenges from soaring prices and shortages of materials including steel, concrete, timber and glass hit the construction sector, with output falling by 0.2% in August after a 1% drop in July.

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Overall, the ONS said the economy remained 0.8% below its pre-pandemic level in August.

Paul Craig, a portfolio manager at Quilter Investors, said supply problems would no doubt weaken growth expectations for the months ahead as disruption caused by the coronavirus and Brexit dragged on the economy.

“The creaking UK economy is taking its time to spring back to life. The problems lie now not with demand but with supply. Acute labour shortages in several pockets of the economy along with chronic skills shortages have the potential to frustrate the economic recovery, and could well dampen any expectations for a strong economic revival over the winter months,” he said.

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