2014 Q3 GDP: domestic demand leads the way

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Today’s GDP estimates confirm a slight slowdown in the UK economy, with export-intensive sectors most affected. After strong growth in the first six months of the year, the pace of growth has slackened in manufacturing; a result of weaker demand from key markets including Europe and China. Nonetheless, sentiment with regards to the domestic economy remains relatively upbeat, and manufacturing sectors with strong exposure to the UK should do particularly well. Manufacturing is still on track to grow at its fastest pace since 2010.

2014 Q3: what’s new?

The whole economy output grew 0.7% in the third quarter of the year, matching the consensus estimate. As expected, this is softer than the growth rate of 0.9% seen in Q2.

Today’s data shows that manufacturing output increased by 0.4% in Q3, suggesting output was flat in September. This marks the sixth consecutive quarter of growth for sector.

Nonetheless, this confirms expectations of slower growth for the sector in the the second half of this year compared with the first half. One of the key reasons for a slowing in the pace of growth is the weaker situation in Europe, which is hurting export demand.

Indeed, looking below the manufacturing headline, it is clear that those manufacturing sub sectors more closely linked to domestic construction and consumption – such as non-metallic minerals, rubber and plastics and food – have done well.


The picture is more mixed when it comes to other sectors. For example, the electrical equipment sector has had a challenging few months, with anecdotal evidence suggests that while there is demand, in some cases orders were “shifting out to right” due to economic uncertainty. The longer-term pipeline for this sector is good, however, as companies stand to benefit from domestic projects.

Textiles also had a bad August – which may be linked to delayed sales as a result of warmer weather. Nonetheless, the sector should grow this year, as it benefits from increasing demand for UK-made products.

What’s the outlook?

Today’s data does suggest that the economy will continue to grow across the whole of the second half of the year, though it is likely to continue at this slower pace.

Recent business confidence surveys have remained relatively upbeat, for example September’s PMIs were well into positive territory for all sectors. But there are some real signs of softening, particularly for manufacturing where the index stands just a little above its long term average, and export orders growth was at its slowest rate in eighteen months.

Nonetheless, after a strong start to 2014, it still seems likely that manufacturing will grow by over 3% this year.


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