The UK economy failed to grow by even the most cautious of expectations in July due to supply chain issues, rising Covid cases and workers isolating due to the ‘pingdemic’, but investors should not lose faith, according to market commentators.
In July, GDP rose 0.1% month-on-month and remains 2.1% below its pre-pandemic level, data from the Office for National Statistics (ONS) has revealed. This is a marked come down from June, when GDP grew by 1% month-on-month.
It was the sixth consecutive month of growth, but the latest figure fell well short of investors’ expectations and has left some concerned over the fragility of the recovery.
Derrick Dunne, chief executive of YOU Asset Management, said: “UK GDP almost flatlined in July, confirming even more abruptly than expected that the economic rebound has lost its momentum.”
Indeed, it was the slowest monthly growth since the UK was plunged back into lockdown in January 2021.
There were pockets of success. Arts, recreation & entertainment was up 9% month-on-month after ‘Freedom Day’ allowed for the return of live events, while production output rose 1.2% – the main driver of growth for the month.
However, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said there was a particular concern around supply chain issues, which have worsened since July.
“Companies in industries right across the board are warning of problems. If fewer cars roll off production lines, if drivers aren’t available to deliver goods and if shelves go bare, then the only way for output to go is down,” she said.
This can already be seen in the numbers, with a 0.3% contraction in consumer-facing services in July due to a fall in retail sales. Construction was also a weak spot, with negative growth for the fourth month in a row.
August figures are expected to be better but September could be an issue as furlough ends, with some workers expected to lose their jobs at the conclusion of the scheme.
Streeter said: “The ongoing struggle to hire staff isn’t going away any time soon, with post-Brexit rules making hiring many workers from Europe difficult. These are not just temporary bottle necks, with a skills gap looming for so many industries, driving up staff wages and inflation.”
Despite the recent figures, now is not the time to give up on the UK, however, according to Dunne, who said that the recovery is still underway.
“Continue to embrace the opportunities, but don’t lose sight of the spectre of inflation and its possible consequences in the months ahead,” he said.
AJ Bell financial analyst Danni Hewson agreed. She said that the recovery was always likely to be filled with potholes, but that many issues that hampered the growth in July has now been overcome.
“Isolation rules have been relaxed, much to the relief of employers up and down the country, the vaccination roll out has continued apace and Delta variants appear to have been kept at bay,” she noted.
“The engine may have come close to stalling in July, but the economy is still ticking over and should continue to do so as long as there’s no need to slam the brakes back on.”
Paul Craig, portfolio manager at Quilter Investors, said investors should focus on quality businesses, as these are the type that will thrive if the economy continues to wobble.
“Those with pricing advantages and strong competitive positions will benefit from an uptick in inflation, while those with established and resilient supply chains should overcome the current issues. Investors will want to pay attention to these businesses as the recovery plays out as that is ultimately where the value will lie,” he said.