UK economy expands in August after July dip, but growth undershoots expectations

© Niklas Halle'n/Getty Images The UK economy rebounded in August. Niklas Halle'n/Getty Images

• The UK economy grew in August after shrinking in July, but the expansion undershot expectations.
• UK GDP grew 0.4% in August after a fall of 0.1% in July, leaving the economy 0.8% smaller than before COVID struck.
• Economists said supply-chain problems and high energy prices now pose problems to UK growth.

The UK economy expanded in August after shrinking slightly in July, but growth narrowly undershot expectations and analysts said supply shortages would make the coming months difficult.

UK gross domestic product grew 0.4% in August after a revised 0.1% fall in July, the Office for National Statistics said Wednesday. August's reading was below expectations of 0.5% growth.

Output in the all-important services sector grew 0.3%, leaving it just 0.6% smaller than in February 2020.

The August expansion left overall UK GDP 0.8% below where it was in February last year, the ONS said. That's a much smaller gap than in July, after previous months' growth figures were revised upwards.

"The economy picked up in August as bars, restaurants and festivals benefited from the first full month without COVID-19 restrictions in England," Darren Morgan, director for economic statistics at the ONS, said.

Video: Higher energy prices could force central banks to react, IMF's Adrian says (CNBC)

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Market reaction to the data was muted, with the pound up 0.4% against the dollar to $1.364 and the FTSE 100 stock index 0.26% lower.

The UK economy grew rapidly in the second quarter, but growth has slowed in recent months as the recovery has shifted into a lower gear. Rising delta variant coronavirus cases weighed on growth in the summer by forcing thousands of people to self isolate.

Now, economists say the economy faces more hurdles in the form of supply chain disruptions and soaring energy prices, which led to panic buying at gas stations in early October.

The International Monetary Fund on Tuesday said the UK's recovery will lag behind that of the other G7 nations, as coronavirus and Brexit leave scars on the economy. It said UK GDP would be around 3% smaller in 2024 compared to the IMF's forecasts in the fall of 2019.

Inflation has surged in the UK in recent months, and is expected to top 4% by the end of the year. The Bank of England is expected to be the first major central bank to raise interest rates. But economists said slowing UK growth may force BoE officials to rethink.

"We suspect shortages will be a bigger drag on GDP in September and October - the petrol crisis probably prevented some people from getting to work," Paul Dales, chief UK economist at Capital Economics, said.

"So while the chances of a rate hike this year have risen recently, a weaker activity outlook means it's not a done deal."