ONS is really spoiling us with its data extravaganza. The launch of a tranche of stats on GDP, production and trade tell us quite a bit about what’s happening in the economy. But it needs a bit of unpacking first. Our initial read out confirms our expectations for growth set out at the start of the week, namely...
- GDP growth looking a bit better
- But far from certain that this will be a continuing trend in the second half of the year
- Manufacturing had a tough q2, but it’s not terminal with growth in May and June
- Some lights flashing on the global dashboard with big drop in non-EU exports
0.4% growth in the three months to June
The new release format of monthly GDP stats means we saw a month by month breakdown of activity on the output measure and the whole quarterly shebang, including breakdowns on consumer spending, trade and investment.
The growth picture has improved with GDP expanding by 0.4%, up on the measly 0.2% in the first three months of the year. But the sector contribution to this was very uneven. Services chugged away for most of the quarter adding to growth, and construction has clearly pushed past the weather-related disruptions from earlier in the year with a solid expansion in May and June.
Manufacturing in technical recession
Manufacturing, on the other hand, pulled down overall GDP growth in q2. And yes, that makes two in a row, so technically a recession. Before we hit the panic button, there could yet be changes which revise away the small q1 drop and with growth returning in May and June, another quarter of decline in the three months to September is absolutely not a done deal.
There has, however, been a marked shift in the drivers of manufacturing growth since the heady days of last autumn. Back then global growth and a more confident manufacturing industry around the world were providing a big boost for the sector – as evidenced by growth seen in sectors which have a high degree of exposure to final demand from investment goods or overseas markets (see chart below).
Not only have these sources of demand come off the boil in the past three months they’ve really swung into reverse – especially on the investment side. Could this be an indication that confidence is starting to stutter in the face of mounting trade tensions?
Possibly adding a bit of weight to this hypothesis is the pretty poor export picture. Overall in q2 net trade was quite a big drag on GDP growth. Goods export saw big falls with April and May seeing some of the weakest export sales values in over a year. Digging down into exports of manufactures there were hefty drops in sales of materials (down 9.4% on the quarter) and machinery and equipment (-11%), notably to markets outside the EU. The trends in exports to the rest of the EU were only slightly better.
What does the future hold?
Most forecasters expectations were right on the money – the q1 weakness was temporary and growth shown a modest bounce back in q2. Still, it’s a struggle to see much in the data that suggests even more bounce in the second half the year.
We’re not predicting manufacturing doom, but there are some reasons to worry. The big sources of growth for industry last year seem to a have dried up – falls in both the index of production and trade series for sectors like mechanical equipment and metals are setting off some alarm bells about global manufacturing confidence. And we are now looking to sectors traditionally more reliant on household final demand to do a bit more heavy lifting – that may not prove fruitful if Brexit negotiations and talk of a no deal further dent confidence.
Our central expectation is for the economy to chug on in the remainder 2018 but it’s less clear that manufacturing will be making much of a contribution to that.