6 June 2018


UK economy on track for a better Q2

While the ONS left their original estimate for Q1 GDP growth unchanged at an anaemic 0.1%, recent data suggests that Q2 will see a broad-based rebound in economic growth in the UK economy. 

UK economy on track for a better Q2

The second ONS estimate for Q1 2018 GDP growth came in at 0.1% (unrevised from the preliminary estimate), disappointing expectations that UK Q1 GDP would quickly be revised upwards. The expenditure breakdown pointed to a picture of subdued economic momentum with weak household spending growth, a marginal fall in business investment, and no support from net trade. Bad weather was still cited as a key factor that dragged on growth, especially in the construction and retail sectors – chiming with the CBI’s retail and consumer surveys (DTS) and member anecdote.

Retail sales volumes (including fuel) grew by 1.6% in April, which marked a recovery in sales following a decline of -1.1% in March (due to adverse weather conditions). Despite the pick-up in April, year-on-year growth in retail sales remained subdued. This likely reflects the ongoing pressure on living standards. Although real wages are now (slowly) rising, any further improvement will be gradual, as continual weakness in productivity holds back wage growth.

The CBI’s Service Sector SurveyCBI’s Service Sector Survey for the three months to May pointed to divergence between sub-sectors. Business and professional services optimism improved amid a pick-up in volumes growth to the fastest rate since August 2015. Meanwhile, consumer services saw volumes fall and optimism deteriorate. Looking ahead, business and professional services firms expect volumes, profitability, and employment to continue expanding at a healthy pace over the quarter to August. Although consumer services firms expect volumes to edge up, profitability is expected to deteriorate slightly further and hiring intentions have stalled.

The CBI’s Growth Indicator saw a noticeable pick up in the quarter to May, driven by strong growth in business & professional services and distribution. By contrast, volumes continued to fall in consumer services, and manufacturing output was unchanged after growing steadily in recent years. Overall, private sector growth accelerated in the quarter to May, with the balance of firms reporting a rise in output standing at +10%, up from +3% in the three months to April. Looking ahead, private sector growth is expected to strengthen over the three months to August (+23%), underpinned by steady growth in business and professional services alongside an acceleration in manufacturing, distribution, and consumer services growth.

The IHS Markit/CIPS Purchasing Manager’s Index (PMI) composite indicator of economic activity rebounded in May to 54.5 from 53.2 in April, surpassing consensus expectation (53.4). This expansion was driven by stronger growth in manufacturing and services, with construction growth remaining broadly unchanged. These results seem to point economic growth being on track to rebound in Q2, after poor weather contributed to the tepid GDP growth observed in Q1.  

For more information contact Martin.Sartorius@cbi.org.uk