What happened in the UK economy in 2017q2?

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Today we got first sight of official statistics for UK economic growth in the second quarter. It’s not exactly an information bonanza, but after a weak start to the year, conclusive evidence will nevertheless be sought on what impact Brexit (or the debate … such as it is) is having on growth and what this means for the MPC’s next decision. So what did we get this morning?  

Growth was still subdued

In the three months to June the economy is estimated to have expanded by 0.3%. A fraction higher than the 0.2% growth recorded for the first quarter of the year. Still, this is a fair bit adrift of the pace of expansion in the latter part of 2016.



Households are not the only drag

Much of the explanation for the q1 weakness centred on the sharp deceleration in services growth.  In the first three months of the year the dominant service sector increased by just 0.1%. At the time this seemed totally explainable – we’d seen commodity prices and the Brexit-related sterling slump push up consumer prices, while at the same time average earnings growth was trailing behind. The consequent squeeze explained why households had applied to brakes.

The story of hard pressed consumers caught between the rock of rising inflation and the hard place of sluggish wage growth is still in play in the second quarter, but it’s not as dominant as it was at the start of the year. This is perhaps explained by recent rapid increases in consumer credit, alongside the continuing fall in unemployment.

While the service sector performance was still sub-par, it did show some growth.  Unlike manufacturing and construction, which seem to be the bigger culprits for the weak print. Output in these sectors contracted by 0.5% and 0.9% respectively. 

What about the surveys?

The fall in manufacturing output after a couple of decent quarters does look somewhat out of synch with more positive headlines coming from recent private sector surveys – not least our own Manufacturing Outlook.

A closer look at the trusty low level aggregates from ONS help square the circle on this. The biggest contraction in output over the quarter was the (once buoyant) motor vehicle sector. Production was down over 6% in the quarter. This from a sector that has seen output expand every single year since 2010.


When signs of this weakness first materialised, thankfully SMMT were on hand with some facts. The main one being that production schedules were being affected by the introduction of new models. 

After a record start to the year, car production in the UK has slowed as production lines gear up for a range of new models


They are optimistic about global demand prospects more generally, which should mean that this quarter’s weakness will unwind in the coming quarters.

Global demand is strong and exports remain the driving force for British car production volumes in the UK.

Mike Hawes, SMMT Chief Executive. 29th June 2017 


Other notable sub-sector weaknesses can also be found in construction related sectors, such as rubber and plastics and non-metallic minerals.

What does it all mean?

This has been the weakest first half the year in five years. While we’re not overly downbeat about the manufacturing picture, the drag it provided to growth this quarter should show that a weak pound isn’t enough to ensure industry can pick up consumers’ reins on growth. And while there are inevitably lots of employees and lots of businesses feeling uncertain about Brexit, the magnitude of the effect on the economy cannot yet be quantified. We probably can say that there isn’t anything here that will sway more MPC members to vote for a rate rise next week.




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