The Government cut National Insurance rates for employees from January but freezes to tax thresholds in April will increase personal taxes, in real terms.
As restrictions have eased across the UK, and support measures start to wind down, many economic indicators are showing the UK performing well at the end of August. But staff shortages due to Covid-19 and supply chain issues continue to affect the services and manufacturing industries.
This Insight looks at economic data released during August 2021 and discusses what it might mean for the economy as we head into the autumn.
Economy on track to make up lost ground
The UK’s GDP fell by 9.8% in 2020, the steepest drop since consistent records began in 1948. However, it has been growing strongly in recent months, with an increase of 4.8% in April to June 2021, compared to the previous three months.
It’s not clear when the UK’s economic activity will reach pre-pandemic levels, but analysis published by the Financial Times suggests that it is entirely possible that this will happen before the end of 2021.
This growth has been good news for the public finances, with Government borrowing well below the Office for Budget Responsibility’s (OBR) forecasts.
The Government borrowed £78 billion between April and July 2021. This was £62 billion less than during the same period last year and well below the OBR’s forecasts from March 2021 (as shown in the chart below). This may leave the Chancellor with more room to manoeuvre in the autumn Spending Review.
Inflation this month was surprisingly low given the scale of the recovery, at 2.0%. However, this may be partly linked to prices rising this time last year (as restrictions from the first lockdown were eased), and most forecasters think that inflation is likely to temporarily rise again towards the end of the year.
Labour market remains strong as the furlough scheme begins to unwind
The labour market remains in a strong position, at least for now. The number of job vacancies was at a record high of 953,000 in May-July, while the number of employees on payroll has continued to increase.
Official employment and unemployment figures also show the UK is in a strong position. The employment rate rose and the unemployment rate fell between April and June 2021.
For people aged 16 to 24, the rise in employment has been particularly strong. This age group experienced a large fall in employment rates at the start of the pandemic.
Since the start of July, the Coronavirus Job Retention Scheme (CJRS, often called the furlough scheme) has been winding down.
Grants under the CJRS covered only 70% of an employee’s wages (down from 80%) from 1 July and this fell to 60% on 1 August. The scheme is due to close at the end of September. The effect this will have on employment is unknown, but as of 30 June 2021 there were still 1.9 million jobs on furlough. Independent forecasts compiled by HM Treasury currently predict an unemployment rate of between 4.8% and 6.0% in October to December this year, above the current 4.7%.
Supply and staff shortages dampen growth
Among all the optimism of this month’s data releases, there is still room for a note of caution.
Purchasing Managers’ Indices (PMI) for both the services and manufacturing sectors fell slightly in August, suggesting the expansion of both sectors is not as strong as it has been. Respondents to the PMI surveys cite staff shortages due to Covid-19 and supply chain issues as the main areas of concern, and both could continue to restrict growth.
Business and consumer confidence also appears to have cooled slightly. Output expectations from the Confederation of British Industry’s Industrial Trends Survey fell in August, as did analytics company GfK’s Consumer Confidence Index. However, it is worth noting both measures are around or above their pre-pandemic levels.
Overall, there is much to be cheerful about as Parliament prepares to return from its summer break. However, it may not all be plain sailing as we head into the autumn; it might not just be the weather that begins to cool over the next few months.
- Read our full briefing on the economy in August 2021: Economic Indicators, House of Commons Library.
- Coronavirus: Impact on the labour market, House of Commons Library, August 2021
About the author: Philip Brien is a researcher at the House of Commons Library, specialising in public spending.
Inflation fell to 3.9% in November but the impact on households may have been higher.
Amid low growth and high inflation, unemployment is rising and there is concern that continued high interest rates might cause trouble for households with debt.