UK's lagging economy lost more speed in September, worse ahead

By William Schomberg and Andy Bruce

LONDON (Reuters) - Britain's economy grew by a slower than expected 1.1% in September from August, lagging other rich nations as it struggled to recover from the shock of the pandemic even before the latest COVID-19 lockdown.

The slowdown in Thursday's official data cemented expectations that the economy will shrink again as 2020 ends, with uncertainty about the Dec. 31 deadline for a post-Brexit European Union trade deal adding to the coronavirus drag.

Between July and September, gross domestic product grew by a quarterly record of 15.5%. But that failed to make up for its nearly 20% lockdown slump between April and June.

Analysts polled by Reuters had expected the monthly growth rate to slow less sharply, to 1.5%.

The economy is being propped up by more than 200 billion pounds of emergency spending and tax cuts ordered by finance minister Rishi Sunak and the Bank of England's almost 900 billion pound bond-buying programme.

Despite those efforts, Britain -- which passed 50,000 coronavirus fatalities on Wednesday, Europe's highest death toll -- has suffered the biggest GDP drop among major economies listed by the Office for National Statistics.

Britain's initial lockdown lasted longer than in other countries and hammered services firms which make up 80% of the economy.

GDP remained almost 10% smaller than at the end of 2019, twice as big as the falls in Italy, Germany and France and nearly three times the size of the U.S. drop, the ONS said.

BoE Governor Andrew Bailey said there was still a "huge gap" in the economy but news of a potentially effective COVID-19 vaccine would help lift the uncertainty.

"It's encouraging for individuals, it's encouraging for businesses and it's encouraging for the economy," he told a Financial Times event on Thursday.

"I think we have to be cautious because obviously there's still quite a way to go in terms of the trialling."

Last week, before the news of the vaccine trials, the BoE said the world's sixth-biggest economy was likely to shrink by a record 11% in 2020 before growing by just over 7% in 2021.

"Britain's COVID crisis, and its recovery phase, will take far longer than many people first thought," said James Smith, research director of the Resolution Foundation think-tank, urging Sunak not to start reversing his spending surge quickly.

NEW LOCKDOWN

Sunak said steps taken to restrict the spread of COVID-19 were likely to have slowed economic growth since September.

"Today's figures show that our economy was recovering over the summer, but started to slow going into autumn," he said. "The steps we've had to take since to halt the spread of the virus mean growth has likely slowed further since then."

The BoE said last week that GDP could shrink by 2% in the October-December quarter.

Prime Minister Boris Johnson ordered a new, month-long lockdown for England from last week as coronavirus cases mounted. But this time construction and manufacturing firms can remain open, and so can schools and universities.

The ONS said Britain's services sector grew by a weaker than expected 1.0% in September from August. Food and accommodation fell by more than 8%, hit by the end of August's one-off state subsidies for diners.

Manufacturing inched up by 0.2% while construction grew by nearly 3%, helped by a post-lockdown housing market pickup.

Business investment was 20.5% below end-2019 levels while household consumption remains down 12.4%.

(Editing by Catherine Evans)