UK growth momentum slows amid Brexit worries and global challenges

11 Feb 2019

Victoria Clarke

UK Economist

Tough morning for Chancellor Philip Hammond as first estimate of Q4 GDP shows rise in output on Q3 falling by 0.4 points to 0.2%

UK GDP figures provided for gloomy Monday morning reading. The first estimate of Q4 GDP showed output rising by 0.2% over the quarter, down from the 0.6% Q3 growth pace and short of consensus expectations and our own forecast of a 0.3% rise.
 
The monthly GDP profile added to worries over the health of the UK economy, showing the fourth quarter closing off on a weak note; GDP fell by 0.4% on the month in December, whilst consensus had been for a flat reading. Rubbing salt into the wounds, over the full calendar year 2018 GDP growth was estimated at 1.4%, the weakest showing since 2012.
 

Economic weak spots

 
Across Q4, the notable weak spots were the industrial and construction sectors, whilst services output was seen expanding quarter-on-quarter. Here emissions tests changes which have caused significant disruption to car production have been a clear drag alongside Vehicle Excise Duty changes in April 2017, which have impacted demand for diesel cars.

0.2%

First estimate of rise in Q4 GDP output over the quarter

0.6%

Rise in Q3 GDP growth over the quarter

The Office for National Statistics (ONS) also highlighted steep falls in steel production. However, whilst there look to be some disruptive forces at play, increasingly we are questioning the persistence of the weakness in UK manufacturing data and the extent to which this is also reflective of a softer global economic backdrop, more evident at the back end of last year.
 

Mixed results for manufacturing

 
Indeed, a look at the sub-detail of today’s manufacturing figures shows us that ‘motor vehicles, trailers and semi-trailers’ production actually rose on the month in December. But the industrial sector still saw a 0.5% monthly fall with a bigger 0.7% decline in manufacturing output, the largest fall since January 2017.
 
Here a sharp monthly drop in pharmaceutical output exaggerated the weakness, but the figures still provide for a downbeat read overall.
 

Construction compounds decline in GDP 

 
Construction output numbers added to the depth of the overall decline in GDP with a 2.8% drop month-to-month. This was the biggest monthly decline since June 2012.
 
While we are always wary that construction output data can be volatile month-to-month, the soft reading does coincide with broadly softer housing activity data too.
2.8%
Month-on-month decline in GDP for the contruction sector
Note that even the dominant UK services sector closed 2018 on a soft note, with output dropping 0.2% on the month in December. In fact, this is the first time the three largest sectors fell month-to-month since September 2012.
 

Business investment impacted by Brexit uncertainty

 
The broad-based weakness evident at the end of 2018 came just ahead of the UK entering (what is scheduled to be) the final quarter of Brexit negotiations before the 29 March 2019 exit date. In addition to a shift in the global backdrop, Brexit worries look to be applying an increasing drag on UK economic momentum.
 
Indeed, away from scrutinising the output sector data, UK business investment figures provided further clues on this hit. Over Q4 business investment was down 1.4%, with this the biggest quarterly fall since Q1 2010. This weak performance stands at odds with that of other G7 countries, as the Bank of England highlighted in its Inflation Report last week, suggesting that this is being driven by UK specific forces.
Theresa May, Prime Minister of the United Kingdom and European Commission Chairman Jean Claude Juncker arrive prior to talks about Brexit strategy in Brussels

Theresa May is yet to reach agreement with European Commission Chairman Jean Claude Juncker over a final Brexit deal

Questions over EU relationship impacting predictions

 
The UK economy’s path forward from here is clearly subject to greater uncertainty than usual, given that there is still no sign of a final Brexit deal being signed-off and backed by UK MPs imminently.
 
Note that importantly UK consumer spending held up relatively well at the end of 2018 and indeed rose by 0.4% over Q4, the 8th consecutive rise. Clearly one point to watch is whether nervous households start to adjust their spending as the Brexit date looms closer.
 
Anecdotes and reports from the high street continue to point to difficult trading conditions with Brexit frequently mentioned as a factor, while metrics (GfK) of UK consumer confidence have weakened to lows last seen in summer 2013.
 
If this does carry through to weaker spending, then the pace of UK economic expansion is likely to remain under pressure.

0.4%
Increase in UK consumer spending over Q4, the 8th consecutive rise
Note though that data will be "noiser" than normal with inventory and trade figures, in particular, affected by firms making Brexit preparations (such as stock building). For what it is worth, activity surveys available for January 2019 point to a softer pace of expansion than at the end of 2018.
 

UK services PMI falls

 
IHS Markit reported that the UK services PMI fell from 51.2 to 50.1 in January putting the index at a two-and-a-half-year low. The composite PMI came down to its lowest outturn since July 2016 (50.3).
 
The Bank of England (BoE) had clearly taken on board the more subdued tone to UK economic releases and the near term outlook in its communications last week. This messaging from the BoE was absorbed by interest rate traders, leading to a flattening in the implied market path for UK interest rates.
 
With this run of economic releases adding weight to this cautious view, sterling weakened with the pound down to $1.29 against the US dollar from around $1.293 before Monday morning’s numbers.

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