UK economy expands in August after July dip, but growth undershoots expectations

In August, the UK's economy rebounded. Niklas Halle’n/Getty Images
After shrinking in July and then growing in August, the UK economy expanded in August. However, this expansion was below expectations.

After a 0.1% drop in July, the UK's GDP grew 0.4% by August. This leaves it 0.8% smaller than before COVID.

According to economists, UK growth is now affected by high energy prices and supply-chain issues.

After shrinking in July, the UK economy grew in August. However, growth was still below expectations. Analysts also predicted that supply shortages will make it difficult to grow in the months ahead.

The UK's gross domestic product increased 0.4% in August, following a 0.1% revision in July, according to the Office for National Statistics. August's growth was 0.5% below what was expected.

The output in the vital services sector increased 0.3%, making it 0.6% less than February 2020.

According to the ONS, overall UK GDP fell 0.8% in August due to an expansion. This is compared with February last year. This is a smaller gap than July's, when previous months' growth figures were revised upwards.

"The economy picked-up in August as bars and restaurants benefited from the first month without COVID-19 restriction in England," Darren Morgan (director for economic statistics at ONS) said.

The market reaction was muted. The pound rose 0.4% to $1.364 against the dollar, while the FTSE 100 stock Index fell 0.26.

Although the UK economy experienced rapid growth in the second quarter of 2018, it has been slowing down in recent months due to the recovery shifting into a lower gear. The summer saw thousands of people self-isolate because of rising cases in delta variant coronavirus.

Economists now say that the economy faces additional challenges in the form supply chain disruptions, soaring energy costs, and panic buying at gas stations, which led to panic buying in October.

The International Monetary Fund said Tuesday that the UK's recovery would be slower than the rest of the G7 countries. Brexit and coronavirus are both causing economic damage. The IMF forecasts for the fall of 2019 showed that the UK's GDP would shrink by 3% in 2024.

Inflation in the UK has risen in recent months and will likely reach 4% by the end the year. The Bank of England will be the first central bank to raise interest rate. However, economists warn that slowing UK growth could force the Bank of England to reconsider.

Paul Dales, Capital Economics' chief UK economist, stated that "we suspect that shortages will be an even bigger drag on GDP in September/October - some people were prevented from getting to work by the petrol crisis."

"So, while there are more chances of a rate increase this year than in the past, it is not certain. A weaker activity outlook also means that it is unlikely."