UK economy at risk of double-dip

Britain’s economy bounced back strongly over the summer but fears are mounting that the recovery is running out of steam.

Retail sales climbed by another 1.5 per cent in September – taking gains in the third quarter of the year to a record 17.4 per cent.

Sales are now 5.5 per cent higher than they were in February before the full force of the pandemic struck, according to the Office for National Statistics report.

With household spending seemingly powering the recovery following the lockdown, the Ernst & Young Item Club estimated that the economy grew 16 per cent in the third quarter.

That follows a record contraction of almost 20 per cent in the second quarter. But it is feared that the recovery is faltering as fresh restrictions to prevent a second wave of the virus take their toll.

A separate report by IHS Markit showed the economy has lost momentum. Its purchasing managers’ index (PMI) – a key gauge of the private sector where scores above 50 show growth – fell from 56.5 in September to a four-month low of 52.9 this month.

‘The pace of UK economic growth slowed in October to the weakest since the recovery from the national Covid-19 lockdown began,’ said IHS Markit economist Chris Williamson.

‘Not surprisingly, the weakening is most pronounced in the hospitality and transport sectors, as firms reported falling demand due to renewed lockdown measures and customers being deterred by worries over rising case numbers.’

Warning that the fourth quarter of the year has started on ‘a weakened footing’, he added: ‘The risk of a renewed downturn has risen.’

Paul Dales, chief UK economist at Capital Economics, said Britain was at risk of a double-dip recession.

He said the slowdown this month ‘comes before the full force of the latest Covid-19 restrictions are felt and supports our view that GDP will stagnate in the final three months of the year, if not contract again.’

He added: ‘The PMIs suggest you shouldn’t read too much into the decent rise in retail sales in September. 

‘Instead, the renewed downward trend in the PMIs provides a better sense of what’s happening to the overall economy. And it’s not looking good.’

The UK economy contracted by 2.5 per cent in the first quarter of the year and by a record 19.8 per cent in the second quarter as the closure of businesses wreaked havoc. 

While the economy bounced back over the summer, it is feared that strict restrictions will derail the recovery.

Sam Miley, an economist at the Centre for Economics and Business Research, said: ‘Some fragility is likely to arise in the coming months. 

‘This stems from the increasingly widespread reimplementation of restriction measures across the country, with this set to impact consumer behaviour.’