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UK CommentMuted rebound in Q2

  1. Adjusting for one-offs, the GDP trend is still deteriorating
  2. Services growth and construction pulled up, while manufacturing pulled down - exports particularly weak
  3. We expect the GDP trend to continue to weaken and the BoE to hike no further
Adjusting for one-offs, the GDP trend is still deteriorating
The preliminary estimate showed UK GDP growing 0.4 percent in Q2, up from 0.2 percent in Q1. This was in line with the estimate of the Bank of England (BoE) and the market consensus. Y-o-y growth in Q2 increased slightly to 1.3 percent in Q2, from 1.2 percent in Q1. According to the ONS, the Q2 numbers likely show unwinding of some adverse weather effects in Q1, however the effects are hard to quantify. Abstracting from these quarterly movements, the underlying trend in real GDP is still one of slowing growth, according to the ONS.
Services growth and construction pulled up, while manufacturing pulled down - exports particularly weak
On the production side, the pickup in GDP growth was driven by services and construction, while production subtracted from growth. Growth in services output increased to 0.5 percent in Q2, contributing 0.4 percentage points (p.p.) to GDP growth, up from 0.2 p.p. in Q1. The strength in services reflected an improvement particularly in wholesale and retail trade, which had been affected by the adverse weather in Q1. Following weakness in Q1, retail sales had bounced back in Q2, driven by strong food and drink sales, much due to warm weather and World Cup celebrations. Growth in business services and finance slowed in Q2 after having been the largest positive contributor to services growth over the past three quarters. Construction output rose by 0.9 percent in Q2, contributing 0.1 p.p. to GDP growth, after subtracting -0.1 p.p. in Q1. However, sector growth in Q2 still remains below the quarterly average for 2017. Output in the production sector fell by 0.8 percent in Q2, the weakest quarterly growth since Q4 2012. This fall was driven by manufacturing and energy supply, as warmer weather conditions had led to a fall in electricity and gas production in April and May. According to the ONS, the weakness in manufacturing largely reflected an easing in export growth, caused by an easing in global demand for products such as UK-produced vehicles and materials for processing destined for China. On the expenditure side, Household consumption, government consumption and gross capital formation all contributed positively to growth, while net trade subtracted from growth. Household consumption increased by 0.3 percent, slightly up from 0.2 percent in Q1. However, the Q2 growth rate was still modest and y-o-y growth in private consumption fell to 1.1 percent, the weakest since Q1 2012. Business investment increased by 0.5 percent in Q2 after falling by 0.4 percent in Q1. The improvement in Q2 saw business investment return to virtually the same level as in Q4 last year. The ONS suggested that the subdued trend in business investment was due to Brexit-related economic and political uncertainties, as reported by external surveys. Changes in inventories and acquisitions less disposals of valuables contributed as much as 0.9 p.p. to overall growth in Q2. However, this was mainly due to a sharp rise in non-monetary gold (NMG) in the quarter, according to the release. Net exports subtracted 0.8 p.p. from GDP growth as exports fell 3.6 percent on the quarter and imports fell by 0.8 percent. The weakness in exports was partly affected by a sharp fall in car exports. Furthermore, growth in the compensation of workers slowed to 0.6 percent in Q2, which was the weakest growth since Q4 2016. This slowdown reflected weaker growth in wages and salaries, offset by stronger growth in employers’ social contributions, according to the release.
We expect the GDP trend to continue to weaken and the BoE to hike no further
Today’s preliminary release of GDP data suggests that the UK economy staged a rather muted rebound in Q2, and sentiment surveys indicate limited momentum ahead. We believe Brexit uncertainty will continue to linger for a long time, taking its toll on the UK economy. We therefore expect both wage growth and GDP growth will be lower than what the BoE currently foresees, and believe that the August hike was the last one from the BoE for the coming two years.




Kari Due-Andresen

Chief Economist Norway

Norway and UK

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