UK economy grew more slowly than thought before Omicron hit

Britain’s economy grew more slowly than previously thought in the July-September period, before the Omicron variant of the coronavirus posed a further threat to the recovery later in the year, official data showed on Wednesday.

Gross domestic product in the world’s fifth-biggest economy increased by 1.1 per cent in the third quarter, weaker than a preliminary estimate of growth of 1.3 per cent as global supply chain problems weighed on manufacturers and building firms.

That was slower than the economy’s 5.4 per cent bounce-back in the second quarter when many coronavirus restrictions were lifted, the Office for National Statistics said.

Investors are braced for a further slowdown in the fourth quarter of 2021 and a weak start to 2022 due to a rise in COVI9-cases caused by Omicron which has hurt Britain’s hospitality and leisure sector and hit retailers.

Prime Minister Boris Johnson has ruled out new COVID restrictions in England before Christmas but said he might have to act afterwards. Scotland and Wales have tightened controls.

“Although the economy has got better at coping with restrictions with each new wave, the possibility of tighter restrictions in January is further darkening the outlook for GDP,” Bethany Beckett, an economist with consultancy Capital Economics, said.

The ONS said households dipped into their lockdown savings to finance their spending. The savings ratio fell to 8.6 per cent of disposable income, down from almost 11 per cent in the second quarter.

Weakness in the health sector, where test and trace work and vaccinations tailed off, and among hairdressers were partly behind the cut to the third-quarter growth estimate.

A fall in energy output, after a surge in demand during a cold spring in the second quarter, also weighed.

“However, stronger data for 2020 means the economy was closer to pre-pandemic levels in the third quarter,” ONS Director of Economic Statistics Darren Morgan said.

The slump in Britain’s economy last year was now estimated at 9.4 per cent, revised from a 9.7 per cent crash, and the ONS believed GDP in September was 1.5 per cent below where it was at the end of 2019, revised up from the previous estimate of 2.1 per cent.

However, Britain’s progress towards regaining its pre-pandemic economic size, in inflation-adjusted terms, remained behind that of most other big rich economies such as France, Germany and the United States, the ONS said.

Business investment fell by 2.5 per cent in the third quarter from the previous three months and was nearly 12 per cent below its pre-pandemic level.

The Bank of England is hoping for a revival of business investment to help improve Britain’s longer-term growth prospects.

Britain’s balance of payments deficit widened to 24.4 billion pounds ($32.35 billion) as goods exports fell, goods imports grew and foreign companies received more income from their investments in the United Kingdom. Economists polled by Reuters had expected a smaller deficit of 15.6 billion pounds. As a share of GDP, the shortfall almost doubled to 4.2 per cent from 2.3 per cent in the second quarter.

Meanwhile the British retail sales growth fell sharply in the first half of December as concerns about the Omicron variant of coronavirus kept shoppers at home, according to a survey which could add to pressure on the government to provide more emergency support.

The Confederation of British Industry’s (CBI) gauge of sales volumes - which asks retailers how sales compare with a year ago - slumped to +8 in December from +39 in November, its lowest reading since non-essential shops were in lockdown in March.

“Our December survey confirms what we’ve been hearing anecdotally about Omicron’s chilling impact on activity on the high street, with retail sales growth slowing and expectations for the coming month sharply downgraded,” CBI economist Ben Jones said.

Cases of COVID-19 have risen by more than 60 per cent in Britain over the past week, with around 90,000 people a day testing positive recently. Prime Minister Boris Johnson has so far refrained from further legal restrictions to slow the spread of the new variant, but has not ruled out taking more action.

Business groups want finance minister Rishi Sunak to provide more help. Sunak was due to comment soon about his discussions with representatives of the hospitality industry who are demanding more government support, a minister said.

“It’s crucial that the government takes steps to help society live confidently with the virus, including meaningful dialogue between business, government and unions to assess the impact of restrictions and the need for future support,” the CBI’s Jones said.

The increase in cases has been especially sharp in London. Shopper numbers fell 8.5 per cent in central London last weekend and by less in other city centres, according to figures from market research company Springboard published on Monday, while the hospitality industry says takings were down by 40 per cent.

The CBI survey showed retailers expected sales to be roughly normal for the time of year in December - having been well above in November - and to be below normal in January.

Retailers had plenty of stock for now, but feared staff absences could lead to renewed disruption of supply chains next month, the CBI added.

Samuel Tombs, economist at Pantheon Macroeconomics, said the slowdown could also reflect how some households did Christmas shopping earlier than normal this year.

“We think that retail sales should be relatively immune to the impact of the Omicron variant, particularly if consumers shift spending away from services venues,” he said. The survey was based on responses from 41 retail chains between Nov. 24 and Dec. 14.