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Summer slump for UK GDP and IMF warning put economy on the backfoot

·2-min read
The UK economy had a washout summer  (PA Wire)
The UK economy had a washout summer (PA Wire)

Weak growth numbers and a warning from the International Monetary Fund (IMF) are adding to headaches in Downing Street and at the Bank of England about the health of the UK economy.

Fresh data from the Office for National Statistics this morning showed the UK economy grew by just 0.4% in August. While an improvement on the prior month, it was weaker than the 0.5% economists had expected.

The ONS also revised down its numbers for July, saying it now believes the UK economy contracted slightly rather than grew. The “pingdemic”, which forced many people to stay home, was blamed for the slump.

The UK economy remains 0.8% smaller than it was prior to the pandemic and is struggling to get back to its pre-Covid position.

“Key sectors of the economy are still struggling, notably retail [and] construction, and many sectors are being hit hard by supply chain issues,” said Jonathan Gillham, chief economist at PwC. “High gas prices are also damaging the economy and there are still issues relating to self-isolation that are particularly affecting the parts of the economy that sell goods overseas.”

The downbeat data came a day after the IMF downgraded growth forecasts for the UK, in line with worsening conditions around the world. The IMF now expects the UK to grow by 6.8% this year, against an earlier forecast of 7%.

The international body told global leaders to be hyper-vigilant about the growing risk of persistent inflation around the world. Inflation, and subsequent interest rate rises to curb it, could further derail growth and make it even harder for the UK to get back on its previous growth path.

“Acute labour shortages are being reported,” Gillham said. “Coupled with the spectre of permanent rather than temporary inflation, there are mounting risks that could jeopardise the pace at which the UK economy can recover from the Covid crisis.”

Susannah Streeter at Hargreaves Lansdown said: “It won’t be an easy ride for Bank of England policy-makers when they meet next to decide when to raise interest rates. Moving too sharply could see the economy go into reverse, but the Bank won’t want to risk losing credibility if prices keep accelerating.”

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