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UK output dramatically slowed in July raising fears of stagflation amid inflation concerns


10 September 2021

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‘’With the wild horses of recruitment difficulties, product shortages and spikes in infection rates running loose, it’s little surprise they dragged back UK economic recovery in July. Amid mounting supply chain issues and the pressure of isolating workers due the pingdemic, growth in output slowed sharply with GDP coming in at 0.1% compared to the strong 1% rebound in June. It may still be the 6th consecutive month of growth, but only just, with the recovery clearly plateauing and GDP stuck 2.1% below its pre-pandemic level. This reading on the health of the economy is significantly worse than expected and a particular worry is that many of the supply chain issues have exacerbated since July, with companies in industries right across the board 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. This was already playing out with a 0.3% contraction in consumer facing services in July, the first drop  since January because of a 2.5% fall in retail sales. Construction was a particular weak spot, contracting for the fourth month in a row, with output down 1.6%. Even the 9% growth in output in the arts, entertainment and recreation sector thanks to the easing of social distancing rules from 19th July wasn’t enough to gee up the recovery. As festival season draws to an end and the novelty of partying fades as Autumn approaches, this sector is unlikely to keep pushing up overall GDP number. Production output coming in at 1.2% was the main driver of growth but that too seems to be down to a one off effect from  the reopening of an oil field production site, which had been temporarily closed. 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. The end of furlough may also make the situation even messier, with workers ejected from positions, but not having the right experience to fill the vacancies on offer. All this raises the unpalatable possibility that stagflation could take hold, where there is a drag on economic growth and knock on higher unemployment, amid the headache of rising prices.’’

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

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