UK GDP: Holding up better than expected

UK GDP picked up in May, rising 0.1% month-on-month (cons.: 0.0% month-on-month) after falling 0.1% month-on-month last month. According to the Office for National Statistics (ONS), businesses citied the conflict in the Middle East as weighing on output growth.

The re-escalation of tensions in the Middle East has also worsened prospects for July.

Against the current macro backdrop and considering the relatively weak Purchasing Managers' Index (PMI), we aren't expecting much growth in June either. The re-escalation of tensions in the Middle East has also worsened prospects for July. Rolling 3M/3M growth remained strong at 0.7% in May, but given negligible month-on-month growth, that should fall.   

If output was to be flat in June, Q2 GDP growth would be on track to slow to 0.4% quarter-on-quarter, from 0.6% quarter-on-quarter in Q1 (nevertheless a respectable growth rate by recent UK standards).

Looking into the details of May’s figures:

• Services output grew 0.3% month-on-month in May after falling 0.1% month-on-month April. The rebound in services output was driven by professional, scientific and technical activity, reflecting strength in medical sciences R&D.
• Production output fell 0.5% month-on-month in May. Falls in output were broad based, with manufacturing the only subsector to record monthly growth, supported by strength in pharmaceutical and metals production.
• Construction output decreased 0.8% month-on-month in May, following a 0.1% month-on-month fall in April and a sharp 1.4% month-on-month rise in March. The largest negative contribution in May came from private housing repair and maintenance, which fell by 5.0% month-on-month.  

July’s latest ONS report suggests the economy is holding up somewhat better than expected, with the Bank of England (BoE) having forecast growth of around 0.1% quarter-on-quarter in Q2. However, growth is expected to slow, and the labour market continues to look relatively soft.

We expect the BoE to keep rates on hold this year as it tries to balance the tension between softness in the economy and above target inflation.

We expect the BoE to keep rates on hold this year as it tries to balance the tension between softness in the economy and above target inflation. However, with the outlook for energy prices so uncertain, so is the outlook for the economy. There are risks on both sides of our forecasts but skewed towards higher rather than lower rates for now given concerns around inflation persistence.  

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