Real GDP growth in the first quarter eased to 0.4% q/q from 0.6% previously. The weaker pace of growth was in line with what both we and the market consensus had expected.
UK economy remains unbalanced
The story was not so good for manufacturing as today’s data showed the sector’s recovery from recession has lost traction. Manufacturing contracted 0.4% q/q, which was the fourth fall in the last five quarters. The weakness of manufacturing was not a surprise because our most recent Manufacturing Outlook survey, and PMI and production data, for the sector had been subdued. The data also showed that services was the only one of the main sectors that grew. Yet services growth weakened to 0.6% from 0.8% in the previous quarter. This, along with the recent softening trend in retail sales, suggests private consumption may have weakened somewhat. We’ll get the full story when the GDP breakdown by expenditure component is out on May 26.
Services remained the backbone of the UK economy. The contributions to growth by sector showed services was the sole driver, while agriculture and construction were drags. Manufacturing, and mining and quarry including oil and gas extraction, neither added to nor subtracted from GDP.
Manufacturing weakness was widespread
The subdued activity in manufacturing was broad based, with falls across most sub-sectors. The largest decline was in basic metals, which has been under pressure from the oversupply of steel on global markets. Sectors embedded in the oil and gas supply chain remained weak, as the low crude oil price continues to dampen the demand of oil and gas companies in the North Sea and abroad for UK manufactured investment goods such as machinery and electrical equipment. Surprisingly, consumer-facing sectors - which have held up in recent quarters – posted falls but upcoming revisions to the data will provide a more reliable picture of how the subsectors performed.
The largest gain was in non-metallic minerals, which was also a surprise given that construction contracted. The only other manufacturing sub-sector to post growth was other transport, which continues to benefit from large order books in aerospace.
The bottom line
The first quarter GDP growth supports our view that the UK economy will expand 1.9% this year. On the manufacturing front, there’s no clear trigger for a major improvement in the coming quarters as the drags from the low oil price, the global oversupply of steel, and weak global growth linger. Yet there are some glimmers of hope. One is anecdotal reports that manufacturers embedded in the oil and gas supply chain are diversifying their activities. Another is that the recent weakness of Sterling against major currencies could boost foreign demand for UK manufactured goods somewhat in the coming months. Yet the depreciation of Sterling isn’t a panacea because the resulting higher import prices will boost input costs.