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Our views 13 July 2023

UK GDP comment: Not as bad as expected, but for not very reassuring reasons

5 min read

UK GDP fell 0.1%M in May after growing 0.2%M in April, better than consensus of -0.3%M.

However, it is important to avoid over-interpreting this one: 1) In terms of GDP falling, there was an extra Bank holiday in May for the King’s coronation and previous extra bank holidays have been associated with falls in GDP; 2) In terms of the data coming in better than expected, services output was flat rather than falling. The biggest positive contributor to services output was ‘human health and social work’ and that seems to have reflected there being less industrial action in May compared to April rather than reflecting underlying economic resilience.

The question now will be how much it rebounds next month. If the UK is true to recent form (where GDP has been – overall – going nowhere fast), this fall will be followed by a similar sized bounce next month.

Details: May industrial production fell (-0.6%M), services output was flat (0.0%M) and construction output fell (-0.2%M).

Big picture – GDP still looks flat: GDP growth was 0.0% in the three months to May. It is still the case that the level of UK GDP in real terms has barely grown at all since late 2021. The level of output in May was only 0.2% above pre-pandemic levels. Although things could clearly be worse, the UK economy simply isn’t growing.

There is a good chance that the UK economy records a negative quarter of growth in Q2. If GDP rebounds in June by 0.1%M, GDP would record 0.0%Q in Q2 (assuming no back revisions), having grown only 0.1%Q in both the previous two quarters. Given the pace of recent GDP growth and the chance of back revisions, it wouldn’t take much for the UK to have been in technical recession already in the first half of 2023.

I still have a technical recession pencilled into my UK forecast for later this year (see ‘Yes, we could still see recessions - Investment Clock economic update’), although there is a limited difference between a short modest technical recession and the kind of growth we’ve already seen in the UK post-pandemic.

I am still assuming that the Bank of England (BoE) isn’t done raising rates and that the lags of monetary policy mean that a substantial chunk of the economic pain from those rate hikes has yet to be felt (see ‘Rate hikes: How long are the lags?’). 

BoE not done hiking: Next week’s Consumer Price Index print is going to be much more important for Monetary Policy Committee decision-making at this point than today’s GDP figures, in my view. The strong pay growth data earlier this week looks consistent with them hiking further, but expectations of economists (and markets) around the August rate decision are likely to be very sensitive to next week’s inflation data.


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