David Page, Head of Macro Research at AXA Investment Managers, comments on the UK’s latest GDP figures:
- UK GDP rose faster than in expected in September, up 0.6% on the month, following a shift to the pattern of growth and a softer rise in August.
- Quarterly GDP for Q3 rose by 1.3%, in line with our expectations but softer than the market consensus of 1.5%.
- The level of growth remains below the level seen immediately before the pandemic and we expect this level only to be recovered in Q1 next year.
- Today’s release leaves our medium-term outlook for growth unchanged. We forecast a 1.0% rise in growth next quarter taking full-year growth to 6.9% in 2021 and 5.2% in 2022.
- We adjusted our rate outlook after the BoE meeting last week to envisage a 0.15% rate hike in December (to 0.25%) and two 0.25% hikes (to 0.75%) next year.
UK GDP rose by 0.6% in September, firmer than the consensus 0.4% and our own 0.3% estimates. In the main this reflected the downward revision to August’s growth, now considered rising by just 0.2% from 0.4% last time around. This left GDP for Q3 as a whole rising by 1.3%, in line with our forecast and softer than the consensus 1.5%. The monthly GDP index suggests the UK is close to the level of output in February 2020 before the pandemic struck, around 0.4% below. However, quarterly data is still 2% lower than the last full quarter’s output before the pandemic (Q4 2019). We do not expect this level to be regained until Q1 next year.
Monthly GDP rose by 0.6% in September. Growth was driven by a stronger rebound in services, which rose by 0.7% on the month after a downward revised 0.1% (from 0.3%) in August. Construction output also posted a strong 1.3% rise on the month, but this followed two successive sharp drops in output in the previous two months, with August’s output also revised down to -0.7% (from -0.2%). Manufacturing output dipped by 0.1% in September, following a downward revised 0.3% (from 0.5%) the previous month. The broader measure of industrial production fell further, contracting by 0.4% this month after an upward revision to the previous month’s output to 1.0% (from 0.8%). All other categories of industry performed worse than manufacturing, water treatment down 0.4%, mining down 0.8%, following a 1.0% drop in oil extraction, and electricity and gas output fell by 1.6% on the month to post its fourth successive decline and in turn reflecting a reaction to sharp price increases.
On a quarterly basis, the 1.3% growth rate in Q3 marked some normalisation from the 5.5% pace of Q2, driven by the re-opening of the economy. We expected this softer increase with July’s pingdemic and problems of a revival of COVID cases compounded by rising prices and supply chain issues adding to headwinds to activity. Growth was still underpinned by a solid rise in consumption, up 2.0%, although this fell short of the consensus 3.1%, meanwhile government spending rose by 0.9% – firmer than consensus 0.7% – and investment spending also rose by 0.8%, driven by a 0.4% quarterly rise in business investment spending, but this was also much softer than the expected 2.4% and 3.5% respectively. Net trade acted as a drag on activity with exports falling by 1.9% in Q3, but imports – buoyed by strong domestic consumption – still rising by 2.5%.
With Q3 GDP growth coming in in line with our forecast, there was little in today’s report to change our immediate outlook for the economy. We continue to expect rising prices and other pressures on household incomes to see a further normalisation in consumer spending and we forecast Q4 GDP growth at 1.0% for Q4, resulting in full year growth of 6.9%. We expect this pace of quarterly growth to gently soften across next year (dipping in Q2, but recovering a little in H2 as we expect supply constraints to have more perceptibly eased by then). We forecast full year growth of 5.2% in 2022. While this pace of growth would see UK output recover its high-water mark of Q4 2019 in Q1 next year, on our forecasts growth would still be materially below the pre-COVID trend by end-2022. However, the UK economy has suffered a range of supply-shocks including from the pandemic – which the Bank of England recently estimated would reduce potential growth by around 2% – and from Brexit, which could get worse if the government allows tensions around the Northern Ireland Protocol to grow. Hence, the pre-COVID trend no longer looks an attainable goal for the UK economy. Following last week’s Bank of England meeting, we have adjusted our outlook to include a 0.15% rate hike in December and two further 0.25% hikes across 2022 (May and November) taking Bank Rate to 0.75% by the end of next year.