A bright GDP result with some clouds on the horizon

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As expected, the UK economy expanded by 0.6% in the third quarter. The positive figure, the best expansion since the last quarter of 2016, is encouraging but it incorporates several factors to take into consideration.

“Beast from the East” vs hot weather wave

If the “Beast from the East” depressed the economy in Q1, the opposite can be said for the hot weather wave in Q3. The UK economy expanded by 0.6% in the quarter particularly thanks to the performance in July where high temperatures and the “it’s coming home” World Cup dream boosted GDP by 0.3% in the single month.

The expenditure side is a very mixed bag

Thanks to the one-off factors cited above, private consumption grew by 0.5% in the quarter contributing for half of the quarterly expansion.

On the positive side we can also find trade with export growing 2.7% (+4.4% for trade in goods) and import remaining flat.

On the negative side, business investment continues to drop with the third quarterly contraction in a row. The last one was particularly negative at -1.2% and when compared to a year ago, business investment is now down by almost 2% confirming what we found out in our latest Investment Monitor.

This is clearly a concern for the future of UK productivity since, as also highlighted in our latest work, under-investment is a key factor for the weak performance we have seen in the latest decade.

 

q3_gdp_exp 

After two quarters of negative growth, manufacturing shows the positive sign

As we underlined a few times this year, manufacturing has struggled to continue expanding as it did in 2017. In Q3, after two quarters of contraction, the sector was able to expand by 0.6% after the 0.1% and 0.7% contraction in Q1 and Q2 respectively.

Overall index of production (which also includes extractive activities and utilities) contributed positively to growth but it expanded less than services (+0.4%) and construction which had another good quarter expanding by more than 2.1%.

 

q3_2018_gdp_output

 

Q4 may not be as exciting

It’s highly unlikely that the good performance of this quarter may be replicated in the next. As stressed earlier, some-one off and seasonal factors have pushed GDP over its current trend.

When looking at monthly GDP, September data was extremely flat with a few indications (such as retail trade data) pointing to consumer spending less than they did in the hottest months. Moreover, PMI data for October where quite disappointing pointing to a much slower growth in the end of the year.

As a last point, investment is dropping very fast and this is a further indication of how the lack of clarity on the future trade landscape, the threats of a trade war, and also market fluctuations are not helping manufacturers and other entrepreneurs to invest for the future.


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