Official statistics out yesterday showed investment rebounding in Q1 2015 after a poor final quarter to 2014. The increase helped to compensate for the easing in consumption and the drag from net trade to keep GDP unrevised at 0.3% q-on-q for the first quarter of the year. Manufacturing GVA increased by 0.1% from Q4 2014 – unchanged from the previous estimate.
Business investment recovers in Q1
After a poor second half to 2014, total fixed investment in the economy grew by a solid 1.5% q-on-q in Q1 2015. This boost has pushed total fixed investment to its highest quarterly level since Q4 2007. This means that even if growth remains flat for the next three quarters, total fixed investment will finally climb in 2015 above its pre-recession peak eight years ago.
The uptick in total fixed investment growth in Q1 was largely driven by a 1.7% increase in business investment – the largest single component of total fixed investment. Business investment increased by 3.7% compared to Q1 2014, marking the twentieth consecutive quarter on the same quarter a year ago growth – the longest in the time series.
In terms of assets, transport equipment rebounded strongly – increasing by 16.8% - after a large slump in Q4 2014 (-12.1%). Investment in ICT equipment and other machinery and equipment continued its decline for a second consecutive quarter, shrinking by another 2.4% in Q1 2015. Nevertheless, this comes on the back of very solid growth for 2014 as a whole in the range of +14.8%.
The figures are more or less in line with expectations of relatively strong levels for investment in 2015, albeit with a slowdown in the pace of growth. The impact of the oil price on North Sea capital spending that took its toll on investment figures for the second half of last year is expected to dissipate towards the latter half of 2015. However, market uncertainty with regards to an EU referendum in the UK as well as with developments in the Eurozone are set to somewhat restrain investment levels in 2015 as businesses turn more cautious on the economic outlook.
Consumption and services post downside surprise
The good investment figures are the bright spot in the second estimate for GDP which left output growth unrevised at +0.3% in Q1 2015. The increase in investment was offset by a slowdown in consumption, a drag from net trade, as well as weak outturns for both the manufacturing and services sectors.
The biggest downside surprise was the slowdown in household expenditure to 0.5% in Q1 2015 from 1.0% and 0.6% in Q3 and Q4 2014 respectively. This is despite inflation dropping to 0% in February and March. Household expenditure is still expected to grow strongly this year on the back of low inflation and labour market improvements.
Growth in the services sector was revised downwards by 0.1 percentage points (pp) to +0.4% in Q1 2015, down from 0.9% in Q4 2014, wiping out gains in the construction sector of 0.5pp in the revised estimates. Construction output still fell by 1.1% in Q1 2015, staying glued in negative territory since the last quarter of 2014.
Manufacturing output unrevised
Output growth in the manufacturing sector remained unrevised at +0.1% in Q1 2015, underpinned by significant sectoral variation. The metals sectors posted a significant upside surprise growing strongly in Q1 despite poor construction figures. The transport sectors continue to grow solidly with the automotive industry benefiting from strong consumer demand while aerospace is benefiting from a strong backlog.
On the other hand, the mechanical equipment and electronics sectors proved a significant drag for the manufacturing industry in Q1. Mechanical equipment is one of the sectors most deeply embedded in the oil & gas supply chain and saw output fall by nearly 7%. The bad quarter for the electronics sector appears to be mostly on the back of weak Q1 growth in its main export markets – the US and Germany.
A slowdown in key export markets appears to be an overarching theme for Q1 with net trade dragging on GDP after the rebound in Q4 proved to be short-lived. Net trade subtracted 0.9pp from GDP in Q1 with both exports dropping and imports increasing. We do not expect this picture to change dramatically for the rest of the year as we forecast net trade to drag on growth in 2015 as well.