Britain's economy posts record growth in third quarter but loses momentum in September

Economy is still 9.7% smaller than before Covid struck at the end of last year

St. Paul's Cathedral and buildings of the City of London financial district are seen as buses cross Waterloo bridge at sunset. The record-breaking rise in growth in the third quarter follows a recordiShow more

Britain’s economy bounced back from recession in the third quarter of the year with record growth of 15.5 per cent, according to official data, leaving the economy 9.7 per cent smaller than before Covid-19 struck.

The UK's return to growth in the three months ended September 30 came as movement restrictions eased following the first lockdown. Analysts warned that the economy is likely to shrink again in the fourth quarter of the year because of the effects of a second shutdown.

“Today’s figures show that our economy was recovering over the summer, but started to slow going into autumn,” said Rishi Sunak, the UK’s finance minister. “The steps we’ve had to take since to halt the spread of the virus mean growth has likely slowed further since then.

“But there are reasons to be cautiously optimistic on the health side – including promising news on tests and vaccines.”

The record-breaking rise in growth in the third quarter follows a record-breaking fall in GDP of 19.8 per cent in the previous three months, according to the Office for National Statistics. However, growth of just 1.1 per cent in September shows that the recovery was “rapidly running out of steam" at the end of the third quarter even before tighter restrictions and the second lockdown were imposed, said Thomas Pugh, UK economist at Capital Economics.

The level of GDP is also 9.7 per cent below where it was prior to the pandemic at the end of 2019 and compared with the same quarter a year ago, the UK economy fell 9.6 per cent.

“On the expenditure side, the rebound in Q3 was driven by consumer spending, which rose by 18.3 per cent quarter-on-quarter,” Mr Pugh said.

“However, business investment remained subdued, only rising by 8.8 per cent quarter-on-quarter. And after making a rapid start, at the end of Q3 the recovery seemed to have largely burned itself out with that 1.1 per cent month-on-month rise in September leaving the economy still 8.2 per cent smaller than it was in February.”

Growth in the services sector was just 1 per cent up in September compared to August, largely due to strong growth in education output as schools started again.

“At 0.5 per cent month-on-month, growth in industrial production was hardly anything to shout about. Construction did a bit better growing by 2.9 per cent, but this still leaves it 7.3 per cent lower than in February,” he said.

Meanwhile, Bank of England Governor Andrew Bailey said on Thursday that Britain's slowing economic recovery in September, before new coronavirus restrictions were ordered, underscored the "huge gap" that remains compared with the economy's size before the pandemic.

The Bank of England injected a further £150 billion ($195bn) of stimulus into the UK economy last week as it warned a second wave of the coronavirus pandemic will lead to a slower, bumpier recovery.

Mr Bailey also said news of a possible effective Covid-19 vaccine was encouraging and would help lift uncertainty holding back the economy, but there was still a way to go in trials.

"It's obviously encouraging us. I mean it's encouraging for individuals, it's encouraging for businesses and it's encouraging for the economy," Mr Bailey said during a Financial Times event.

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

Looking ahead, Mr Pugh said GDP will struggle to rise in October and will take a "hammering in November" as the effects of the lockdown are felt.

"We have pencilled in a hit of 8 per cent month-on-month in November. That would result in a 3.5 per cent contraction in Q4. But the recent news of a potentially effective vaccine means that the outlook beyond the next six months could be much rosier than we have previously anticipated," he said.

Kay Daniel Neufeld, head of macroeconomics at the Centre for Economics and Business Research, is equally optimistic for the road ahead.

"If a vaccine is approved in the next week, we expect this to be a shot in the arm for business and consumer confidence with the potential to unlock a wave of consumer spending and investment ahead of Christmas," Mr Daniel Neufeld said.