Today sees, what is essentially, the monthly download of output statistics for the UK economy from ONS. We get a feast of monthly GDP, index of production and trade releases up to July 2018. In short, the economy has definitely pushed through the weak patch earlier in the year and activity was perking up going into the second half of the year. Before we get carried away with some good news, the economy may be on the up, but it doesn’t mean things are about to take off.
Here’s our take on what was happening over the summer......
The service sector was benefiting from good weather and stronger pay growth
As expected there was some benefit to the service sector from lots of sunshine and lots of sport. A bit of a pick-up in real wage growth hasn’t hurt either, giving consumers a bit more purchasing power. The index of services rose 0.3% in July, with a particularly strong contribution from accommodation and food services. So in many respects, business as usual with services in the driving seat for growth.
Mainly just the weather doing it for construction
But other sectors of the economy weren’t exactly passengers – especially construction, which after a pretty awful start to the year, continued to see further revival over the summer. The industry has now more than made up the ground lost to bad weather and the Carillion collapse at the start of the year and output is 3.6% up on the same time a year ago.
Manufacturing contracts in July (nothing to do with the weather)
Not great news from manufacturing – on the face of it. The index of production is still languishing below last’s autumn’s peak, mainly thanks to a terrible April. The rebound in May and June was, however, short-lived with output declining 0.2% in July.
In contrast to the across-the-board-awfulness of April, the fall in output was concentrated – to a very large degree – in the notoriously volatile pharmaceuticals sector. Though mechanical equipment, which had a stonking 2017, also saw a further downward drift in July.
Metals, food, transport among those bucking the downward trend
There were plenty of other manufacturing sub-sectors posting growth.
- Food and drink chalked up its sixth consecutive month of growth.
- Electronics continued its run of expansion – now running to 13 out of the past 16 months.
- Transport equipment continued its recovery after a wobbly March and April.
July also sees a revival in exports
The global outlook looks to have been providing a bit more support. Net trade was quite a substantial drag on growth in the second quarter; while it’s only one month there are signs that the export picture also took a turn for the better in July.
The value of goods exports rose by just over 5% in the three months to July, with sales to non-EU markets (up nearly 8%) notably better than in the previous three months. This chimes with the slightly stronger than expected export picture in EEF’s recent Manufacturing Outlook report.
And still we’re cautious…
Everything was more or less lined up for growth over the summer, but GDP components don’t look so well aligned for a further acceleration in the autumn.
- The feel good factor for consumers in summer is dissipating, with recent confidence readings suggesting more are saving for a rainy day and feel less upbeat about future prospects.
- The construction recovery may have been just that with new orders since the start of the year raising question marks over the industry’s contribution to growth through the remainder of this year.
- The shape of the global economy, and trade policy developments in particular, make us hesitant about predicting a further surge in sales in the next couple of quarters.
And that’s before we even mention Brexit (I’m not going to). For these reasons we still think GDP growth of 1.2% – at the lower end of the G7 spectrum – is on the cards this year.