UK GDP: Strong in Q1, but don’t count on it lasting

After a subdued start to the year, UK growth picked up in February, then grew a solid 0.3% month-on-month in March. That saw Q1 grow 0.6% quarter-on-quarter, strong by UK standards and in line with consensus.

Looking at the detail for Q1, consumer spending rose a more than respectable 0.6% quarter-on-quarter (consensus 0.3% quarter-on-quarter), government spending rose 0.4% quarter-on-quarter (consensus 0.6% quarter-on-quarter). Gross fixed capital formation fell, but there was a rise in business investment (albeit after a very weak Q4). Looked at from an output rather than spending perspective, the main driver was services rather than manufacturing (with the biggest contribution coming from the wholesale/retail category).

I’d flag a couple of things though:

• Doesn’t match the business survey message: First, that the GDP figures for March do not tally with the more pessimistic message coming from business surveys in the wake of the Middle East conflict where the PMI business survey had indicated slowing and subdued private sector activity growth and where consumer confidence had deteriorated. Consensus expectations had been for -0.1% month-on-month.  It may be that the March figures end up getting revised down a little or that more activity than expected was pulled forward to March with implications then for a weaker April/May.
• Seasonal adjustment concerns: Second, the Office for National Statistics (ONS) is highlighting some concerns around seasonal adjustment. In a blog it explains that seasonal patterns have seen large changes since the Covid pandemic. Non-seasonally adjusted activity isn’t falling as much as it used to in Q1. The ONS is adapting to this, by changing its seasonal adjustment. But, in real time, as it points out, it is hard to judge how much variation in growth is actually about new seasonal patterns. Some of the change in patterns of spending may relate to budgets – at least for this Q4/Q1 I saw anecdotal evidence of activity being temporarily held back in Q4 as spending decisions were deferred until after the Budget. The ONS suggests that at this point an alternative measure of growth, more robust to these changing spending patterns is just to average GDP across Q4 and Q1, which gives us 0.4%Q. That is still not bad by UK standards and roughly in line with the historical average. 

I am expecting the effect of the conflict (and more UK political uncertainty, possibly) to show through more in Q2 GDP.

Worse in Q2

I am expecting the effect of the conflict (and more UK political uncertainty, possibly) to show through more in Q2 GDP. On a quarter-on-quarter basis Q2 is likely to be slower given the conflict, although households will be shielded from some of the impact until electricity and gas bills rise in July.

March detail also suggests the coming months may see payback

Looking into the detail of March’s figures, services output grew 0.3% month-on-month, led by information and communication as well as accommodation and food services. Production output fell (though within that there was a 1.2% rise in manufacturing). Construction jumped 1.5% month-on-month. So where was impact from the Middle East conflict? According to the ONS there were anecdotal comments on this that were both positive and negative in terms of impact. To me, both imply the potential for a significant slowing in April/May: negative comments were seen across a range of areas (e.g accommodation and travel agencies) and “Many of these comments also cited likely negative impacts for future months as well.” [my italics]. However, “Some comments also cited activity being bought forward in anticipation of increases in costs because of conflict.” Comments again came from a number of industries. It seems reasonable to expect then, that there will also be some payback for this activity having been brought forward in the data in coming months.

For more on my UK outlook, see: Energy shock hits outlook.

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