UK GDP Preview (Aug 14): Small GDP Rises Hardly Worth Shouting About?
There are some better signs as far as June GDP is concerned, not least it having been the warmest even such month in England. But we see only a 0.1% m/m rise (Figure 1), even with slightly better property and retail signals for the month. However, such an outcome, while a contrast to the two successive declines in the previous months, hardly alters what is at best a feeble real activity backdrop that may actually be weaker than the near flat underlying picture seen by the BoE. Such a June result would mean Q2 GDP at around 0.1% q/q, higher than we thought a month ago, but less than half of current BoE thinking and with consumer spending virtually stalling (Figure 2). But with possible housing market weakness and fiscal problems now very accentuating downside activity risks ahead, any message from both June and Q2 GDP numbers may be too dated to matter much.
Figure 1: GDP Weakness Persists?
Source: ONS, CE
After two successive upside surprises, a correction back in monthly GDP was not entirely a wholesale surprise for April GDP. But that 0.3% m/m drop was almost repeated in the May numbers (Figure 1), where a further albeit smaller (ie 0.1%) fall occurred, but very much below consensus. Admittedly there were some upward revisions to data before April, which have created base effects that may (now) prevent Q2 seeing a q/q fall. Regardless, especially given private sector softness, the latest GDP outcomes thereby add to a gloomier economic backdrop most recently highlighted by growing signs of labor market weakness and where risks ahead are building from several areas, not least o the fiscal side. As a result, we think that Q2 GDP will rise a notch in q/q terms but may be as weak in Q3, the former undershooting BoE thinking of a rise of around 0.25%. The weakness we envisage chimes with business surveys, payrolls and tax outcomes. If this pattern persists (let alone if it is even worse, then the BoE’s relative complacency regarding the economy is likely to shift and possibly rapidly as we may learn from the imminent MPC decision. The question is how and when the MPC reacts to a possible fiscal tightening worth up to 1.8% of GDP according to some media stories, one of the largest ever fiscal consolidation programs.
Figure 2: Consumer Recovery Fragile?
Source: ONS, CE
Indeed, it seems even more to be the case that Q1 numbers may have been boosted by added production destined for the U.S in anticipation of tariffs, this evident in an industry reported slump in car production for the month of some 25% m/m (ie enough to knock GDP by 0.2 ppt itself. In addition, real estate activity seems to have dropped after the raising of effective stamp duty. Moreover, we already know that retail sales having dropped clearly in May, hardly recovered in June despite warm weather and where more topical insights suggest much softer picture emerging. Against this backdrop, the May GDP numbers could have been much worse and would have been had it not been for some fresh rises in public services, without which the May drop would have been twice as large and where recent GDP rises would have been minimal!