UK GDP: Not as slow as expected, but details disappoint

UK GDP surprised on the upside in Q2 and in June. GDP rose 0.3% quarter-on-quarter (consensus: 0.1%) after a 0.7% uplift in March.

Considering this was the quarter where we saw the National Insurance tax hikes kick in (plus changes in stamp duty) and that some activity in the UK would have been brought forward to Q1 (ahead of tariffs and tax increases), this is a good result. June GDP rose 0.4% month-on-month (consensus: 0.2%) after -0.1% in May. 

Where is this (relative) resilience coming from? The details aren’t so positive. Most of the Q2 growth has come from government spending (the ONS flag vaccinations, public administration and defence). Net exports were neutral rather than a drag on growth as expected, but consumer spending disappointed, growing only 0.1% quarter-on-quarter (after 0.4%). Gross fixed capital formation (i.e. investment) fell 1.1% (after rising 2.0%) and, within that, business investment fell 4.0% (after rising 3.9% in Q1).

In June, gains came on the back of a bounce in industrial production (0.7% month-on-month after -1.3%) and stronger services growth at 0.3% after 0.1%. Construction also bounced (0.3% after -0.5%). Is this the start of a period of stronger growth? The monthly data can be volatile, so I wouldn’t count on it. The rise in services output was encouraging though, driven by “professional scientific and technical activities” (and by a number of subsectors within that, rather than just one) and the wholesale/retail category. On the latter though, the retail sales report for June suggested that weather had been a factor behind stronger sales growth (and May was very weak).

Overall this was a stronger-than-expected release, but the details disappointed and don’t clearly point to a sustainable story.

Overall this was a stronger-than-expected release, but the details disappointed and don’t clearly point to a sustainable story. The PMI business surveys indicate modest positive growth in private sector output at the start of Q3, but the Budget later this year looks likely to bring a further increase in taxation. I continue to forecast modest positive UK growth rather than a recession but find it hard to be upbeat about the near-term outlook.

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