UK GDP growth was revised down to 0.4% quarter on quarter (q/q) in the third quarter from the previous estimate of 0.5% q/q. Furthermore, second-quarter growth was trimmed to 0.5% q/q from 0.7% q/q. This will likely necessitate our GDP growth estimate for 2015 being trimmed to 2.2% from 2.4%.
IHS perspective | |
Significance | GDP growth was limited to 0.4% quarter on quarter (q/q) in the third quarter by sharply negative net trade. Domestic demand was generally healthy. |
Implications | IHS expects GDP growth to improve to 0.6% q/q in the fourth quarter. However, because of the downward revisions to GDP growth in the second and third quarters, we will likely need to trim our estimate of overall GDP growth in the 2015 from 2.4% to 2.2%. |
Outlook | We currently see GDP growth coming in at 2.4% in 2016. The consumer still looks pretty well positioned to contribute appreciably to growth in 2016, although much will depend on how earnings growth develops over the coming year after its recent relapse. |
Revised data from the Office for National Statistics show that GDP growth was slower than previously reported in both the third and second quarters of 2015.
GDP growth is now shown falling back to 0.4% quarter on quarter (q/q) in the third quarter of 2015 after edging up to 0.5% q/q in the second quarter, from 0.4% q/q in the first quarter. GDP growth had previously been reported at 0.5% q/q in the third quarter and 0.7% q/q in the second quarter.
GDP growth had earlier been in a 0.6–0.8% q/q range through 2014 when the economy expanded 2.9% overall.
Year-on-year (y/y) GDP growth moderated to a two-year low of 2.1% in the third quarter. This was down from 2.3% in the second quarter, 2.5% in the first quarter of 2015, and 2.8% in the fourth quarter of 2014. Annual growth peaked at 3.0% in the second quarter of last year.
Construction and manufacturing contraction held back third-quarter growth
Third-quarter GDP growth was held back by contraction in both construction output and manufacturing output. Consequently growth was highly dependent on services activity, while overall industrial production was lifted by markedly increased oil and gas extraction.
UK real GVA (bil. chain-linked British pound) | ||||||
| Q/Q, % change | Y/Y, % change | ||||
| Q3 2015 | Q2 2015 | Q3 2015 | Q2 2015 | Year to date | 2014 |
Gross value added, total | 0.5 | 0.5 | 2.0 | 2.2 | 2.0 | 2.7 |
Agriculture | 0.2 | 0.4 | -0.1 | 1.7 | 0.8 | 14.3 |
Industry | 0.2 | 0.7 | 1.4 | 1.4 | 1.4 | 1.3 |
Manufacturing | -0.4 | -0.6 | -0.9 | 0.1 | -0.4 | 2.7 |
Construction | -1.9 | 0.3 | 1.0 | 5.3 | 3.1 | 7.5 |
All services | 0.6 | 0.5 | 2.4 | 2.5 | 2.4 | 3.3 |
Source: Office for National Statistics, seasonally adjusted | ||||||
Specifically, construction output contracted 1.9% q/q in the third quarter which limited y/y growth to 1.0%. This knocked 0.11 percentage point off q/q GDP growth given that construction output accounts for 5.9% of total output. It seems that construction output was held back by particularly wet weather in August. It should also be borne in mind that there are still significant doubts about the accuracy of the construction data and survey evidence still points to expanding activity even if it has come off its peak levels. Construction output had previously expanded 0.3% q/q in the second quarter and 2.1% q/q in the first quarter.
Overall industrial production growth was limited to 0.2% q/q in the third quarter after picking up to 0.7% q/q in the second quarter from 0.4% q/q in the first quarter; it was up 1.4% y/y. Industrial production was once again limited by falling manufacturing output which contracted 0.4% q/q and 0.9% y/y in the third quarter. This followed a decline of 0.6% q/q in the second quarter and a flat performance in the first quarter as manufacturers were hampered by weak foreign orders amid sterling strength.
Industrial production growth was therefore driven in the third quarter (as it had been in the second) by a substantial increase in mining and quarrying activity. This expanded 2.6% q/q and 12.2% y/y in the third quarter as it was helped by fewer maintenance shutdowns in the North Sea this year and also likely by tax breaks in the Chancellor's March budget. Meanwhile, utilities output rose 1.0% q/q in the third quarter, although it was down 0.5% y/y.
Output in the dominant services sector strengthened to 0.6% q/q in the third quarter from 0.5% q/q in the second quarter and 0.3% q/q in the first quarter; it was up 2.4% y/y. Most services sectors saw decent growth in the third quarter, led by transport and communication (up 1.0% q/q) and distribution, hotels and catering (up 0.9% q/q). Additionally, there was growth of 0.6% q/q in the business, services and finance sector. However, growth in government and other services activity was limited to 0.2% q/q as fiscal tightening measures likely had an effect.
Sharply negative net trade weighed on third quarter GDP growth
On the expenditure side of the UK economy, GDP growth in the third quarter was limited by sharply negative net trade, which knocked 1.0 percentage point off growth. This was in marked contrast to the second quarter when net trade had added 1.6 percentage points to q/q growth (the best performance in four years). In fact, net trade has been erratic through 2015, as there was a negative contribution of 1.0 percentage point in the first quarter.
Exports of goods and services fell 0.3% q/q in the third quarter, although they were up 6.3% y/y. Exports had jumped 2.8% q/q in the second quarter having been flat in the first quarter. UK exports are being hampered by sterling strength, particularly against the euro. Meanwhile, imports of goods and services rose 2.7% q/q in the third quarter and were up 6.3% y/y. Imports had previously dipped 2.2% q/q in the second quarter after an increase of 3.0% q/q in the first quarter.
Consumer spending and business investment healthy in third quarter
Household spending was robust in the third quarter, expanding 0.9% q/q following gains of 0.8% q/q in the second quarter and 0.7% q/q in the first quarter; consequently it was up 3.0% y/y in the third quarter. Consumers benefited in the third quarter from healthy purchasing power coming from negligible inflation, improved earnings growth, and record high employment, while confidence was relatively high. Significantly, the Office of National Statistics (ONS) reported that real household disposable income rose 0.5% q/q and 4.0% y/y in the third quarter.
Total investment held up pretty well in the third quarter as it expanded 0.7% q/q after growth of 1.6% q/q in the second quarter and 0.9% q/q in the first quarter; it was up 3.4% y/y. This was primarily due to business investment growing 2.2% q/q in the third quarter after gains of 0.9% q/q in the second quarter and 2.6% q/q in the first quarter. Business investment was up 5.8% y/y in the third quarter which is encouraging for hopes of further productivity gains following recent signs of improvement. However, government investment dipped 0.9% q/q in the third quarter while there was a 2.4% q/q drop in investment in private dwellings.
UK real GDP (bil. chain-linked British pound) | ||||||||
| Q/Q, % change | Y/Y, % change | ||||||
| Q3 2015 | Q2 2015 | Q3 2015 | Q2 2015 | Year to date | 2014 | 2015F | Nominal share (2013) |
GDP, total | 0.4 | 0.5 | 2.1 | 2.3 | 2.2 | 2.9 | 2.4 | 100.0 |
Domestic demand | 1.4 | -1.0 | 2.1 | 2.0 | 2.5 | 2.5 | 2.2 | 84.4 |
Private consumption | 0.8 | 0.8 | 2.9 | 2.7 | 2.8 | 2.5 | 3.0 | 64.7 |
Public consumption | 0.6 | 1.0 | 1.8 | 1.5 | 2.9 | 2.5 | 2.4 | 19.7 |
Gross capital formation | 3.7 | -8.2 | -2.0 | -0.2 | 0.2 | 8.0 | -0.8 | 17.4 |
Fixed investment | 0.7 | 1.6 | 3.4 | 4.5 | 1.6 | 7.3 | 4.0 | 16.8 |
Exports | -0.3 | 2.8 | 6.3 | 7.1 | -1.1 | 1.2 | 0.0 | 28.3 |
Imports | 2.7 | -2.2 | 6.3 | 5.6 | 3.9 | 2.4 | 3.6 | 30.1 |
Source: Office for National Statistics, seasonally adjusted | ||||||||
Meanwhile, government spending growth moderated to 0.6% q/q in the third quarter after rising to 2.0% q/q in the second quarter from 0.5% q/q in the first; it was up 1.8% y/y.
Finally, domestic demand in the third quarter was helped by an appreciable contribution of 0.7 percentage point from a change in inventories and the statistical adjustment. This was clearly a correction after a negative contribution of 2.2 percentage points in the second quarter.
Consequently, UK domestic demand expanded 1.4% q/q and 2.1% y/y in the third quarter. This followed domestic demand contracting 1.0% q/q in the second quarter and expanding 1.3% q/q in the first quarter.
Outlook and implications
IHS expects GDP growth to improve to 0.6% q/q in the fourth quarter. Latest data and survey news look firmer overall. For example, the purchasing managers' composite output for services, manufacturing and construction averaged 55.6 in November/October, which was up from an average of 55.1 in the third quarter but below 57.2 in the second quarter. Additionally, retail sales were robust overall in October/November. However, October trade data were very disappointing as imports surged and exports dipped.
However, because of the downward revisions to GDP growth in the second and third quarters, we will likely need to trim our overall 2015 GDP growth estimate to 2.2% from the 2.4% made in our December forecast. We see GDP growth coming in at 2.4% in 2016.
The fundamentals should still be pretty decent for consumers in 2016. Persistent low commodity and oil prices should mean UK inflation (0.1% in November) only rises gradually during 2016, which will be helpful to consumers' purchasing power. We also believe that – despite a recent relapse – earnings growth will move higher in 2016 as a consequence of the tightening labour market. High and rising employment will also be supportive to consumer spending. Interest rates will likely rise only modestly in 2016, although some consumers will be affected by tighter fiscal policy and notably reduced welfare benefits (significantly though, Chancellor George Osborne has abolished plans to cut working tax credits in 2016 and 2017).
Muted oil and commodity prices will also help companies' margins, which should be supportive to business investment along with generally healthy company cash positions and relatively favourable credit conditions overall. A growing number of businesses will likely need to invest to expand capacity going forward given now extended healthy economic activity, while recent higher earnings growth could increasingly encourage companies to invest in plant and equipment and in production processes to try and save labour.
Improved growth in the Eurozone should ultimately be beneficial for UK exporters – and global growth is seen improving modestly by IHS from 2.6% in 2015 to 2.9% in 2016 and 3.2% in 2017 – but they may well continue to struggle to exploit this in the near term at least given sterling's ongoing strength against the euro.
However, growth (particularly business investment) may be dampened for a while in 2016 by uncertainty ahead of the referendum on UK membership of the European Union (which is due by end-2017 but we suspect will occur sometime between June and the end of 2016). Furthermore, fiscal policy will be tighter in 2016.
IHS assumes the United Kingdom will vote to stay in the European Union and that reduced uncertainty after the referendum will help GDP growth to edge up to 2.5% in 2017.