UK growth slows as parts shortages hold up production

The UK economy grew by 0.8% in the month of May, well below consensus expectations of 1.5% growth, and much slower than the revised 2% growth achieved in April.

Although the result in isolation is still very strong by historical standards, in the context of the economy re-opening, the latest reading is disappointing.

It appears that supply shortages and production bottlenecks have played a role, as manufacturing output contracted by 0.1%, following no growth in April. The Office for National Statistics reports microchip shortages caused significant disruption to car production, as the manufacture of transport equipment fell by 16.5% - the largest fall since April 2020.

Supply shortages for the construction industry may have also held up work, as the sector saw output contract for the second consecutive month.

Services activity grew by 0.9%, again, below consensus expectations of 1.6% growth. However, there was an encouraging continuation in the recovery of the accommodation and food sector – one of the most negatively impacted sectors during the pandemic.

Output rose by 37.2% on the month, meaning that the level of activity is now 18.3% below its pre-pandemic peak. Although international travel restrictions are slowly being eased, many in the UK will have recently booked domestic holidays for the summer. As a result, we expect very strong growth over the coming months as those bookings are realised.

Overall, some disappointment from the latest report on the economy, but it’s not too concerning at this stage. Assuming a similar growth rate for June, and the economy should record over 5% growth for the quarter.

As restrictions continue to be removed, we expect more businesses to return to some form of normality, supported by strong pent-up demand from the household sector. This allows for fiscal policy to begin some of its withdrawal, as some of the costs of the furlough scheme are passed on to businesses.

Meanwhile, monetary policy is expected to remain very loose for quite some time. The overall level of GDP is now 3.1% below its pre-Covid-19 peak, and has further to go before domestic inflation pressures start to mount.