After a summer of ‘bouncing back’, the UK economy is showing signs of slowing growth. The latest figures show that monthly GDP growth slowed in May-July and retail sales fell July-August.

While job vacancies reached another record high in June-August, the upcoming end of the furlough scheme means uncertainty about labour market recovery.

This Insight explores economic data and discusses how this might impact the economy as coronavirus support is wound down.

Latest figures raise doubts over the strength of recovery

The UK’s GDP continued to grow in May-July 2021, seeing a 3.6% increase compared to the previous three months. However, GDP only grew by 0.1% over the month to July, well below the 1.0% increase in June and the weakest monthly performance since January 2021. This suggests economic recovery is slowing.

Retail sales fell by 0.9% in the month to August 2021. This means that retail sales have fallen month-on-month for four consecutive months, despite high expectations for retail footfall once lockdown restrictions lifted.

This may be due to a consumer switch from retail to services after lockdown restrictions eased, but is also partly due to supply chain disruptions in August. 6.5% of businesses in the retail industry reported difficulties in finding materials, goods and services in the two weeks to 9-22 August 2021.

Retail sales have fallen for four months in a row, after increasing from January to April.
Source: ONS series J5EH

Inflation jumped in August

The Consumer Price Index (CPI) inflation rate was 3.2% in August 2021, up from 2.0% in July and up from 1.8% in February 2020. This is already higher than the Bank of England’s (BoE) May 2021 projection that inflation would peak at 2.5% at the end of the year, and in August the BoE revised the forecast to a peak of 4.0% in the last quarter of 2021.

Inflation was 3.2% in August 2021, and has been increasing since March 2021.
Source: ONS series D7G7

This increase in inflation was driven in part by a base effect: inflation is a comparison to the previous year, and prices were low in 2020. In August 2020 the Eat Out to Help Out scheme and the VAT cut meant lower restaurant prices, and oil prices were also very low.

Along with modest price increases in some sectors, global supply shortages and an increase in energy prices also drove up inflation. These effects mean that inflation is likely to continue to increase in the coming months.

Vacancies top 1 million for the first time, but the end of the furlough scheme means uncertainty for the labour market

The most recent data shows that the labour market continues to recover.

The number of employees on payrolls is now at a similar level to pre-pandemic levels, reaching 29 million in August 2021. But overall employment is still below its pre-Covid rate, due to a fall in self-employed people.

In the three months to August 2021, vacancies topped 1 million for the first time since records began in 2001.

Vacancies decreased sharply at the start of the pandemic, but have been increasing rapidly since April-June 2020.
Source: ONS series VACS01

However, this increase in vacancies won’t necessarily mean that all jobseekers will have an easy time finding a suitable role. The Institute for Fiscal Studies finds that the rise in vacancies has been driven by lower-paid occupations: in June 2021, vacancies in the lowest-paying third of occupations were 19% higher than pre-pandemic, while vacancies in other occupations had only just returned to pre-pandemic levels.

End of the furlough scheme

The Coronavirus Job Retention Scheme is set to finish at the end of the month. Latest figures suggest that 1.6 million jobs were still on furlough at the end of July 2021, and there is some uncertainty about what will happen to these jobs when the scheme ends.

The Resolution Foundation points out that even during the pandemic, only 39% of redundancies led directly to unemployment, so it is very unlikely that everyone on furlough who loses their job will become unemployed.

However, the chart below shows that in the industries with the highest furlough levels, there are often more than double the number of furloughed jobs than there are vacancies. According to the IFS, if all the jobs currently on furlough are added to the number of jobseekers, the number of jobseekers per vacancy in June 2021 was nearly double the pre-pandemic level.

In the sectors with the most jobs on furlough, there are many more furloughed jobs than there are vacancies
Source: ONS series VACS02, HMRC Coronavirus Job Retention Scheme statistics: 9 September 2021, Table 10

Overall, the economy continues to recover from the effects of the pandemic, but the momentum built up over the summer seems to be slowing. The winding down of government support as well as rising energy prices means there is more uncertainty ahead.

About the author: Brigid Francis-Devine is a researcher at the House of Commons Library, specialising in incomes and the labour market.

Photo by Jan Antonin Kolar on Unsplash

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