22 November 2018


UK GDP benefits from summer boost in third quarter

ONS data showed that GDP growth picked up in Q3, as the warmer weather provided a boost to a broad range of sectors. 

UK GDP benefits from summer boost in third quarter

However, monthly data indicate that the summer boost has faded, with indicators for Q4 looking softer. Meanwhile, inflation held steady, allowing for a further pick up in real wages – though growth in living standards remains weak compared to pre-crisis norms.

Official data from the Office for National Statistics showed that the UK economy grew by 0.6% in Q3 2018, marking a pick-up in growth from Q2 (0.4%). Growth was likely boosted by the warm summer weather, providing a lift to a broad range of sectors. However, it’s clear that the economy lost momentum within the quarter, with monthly data showing no growth in August and September alone. Furthermore, the expenditure breakdown of GDP presented a somewhat mixed picture for growth: despite solid household spending (likely supported by the warm weather) and a strong pick-up in exports, business investment fell for the third quarter in a row.

While most early indicators for Q4 point to softer growth, the latest Industrial Trends Survey showed that the volume of manufacturing output growth picked up in the three months to November, and remained above the long-run average. Output expanded in 13 out of 17 sub-sectors, with growth being driven predominantly by the food, drink, & tobacco, motor vehicles & transport equipment, and chemicals sub-sectors. Additionally, total order books rebounded after falling in October while export order books remained historically elevated. Output growth is set to slow over the next three months.

CPI inflation held steady at 2.4% in the year to October against consensus expectations of a slight uptick in inflation to 2.5%. We had also expected inflation to pick up (to 2.6%). Beneath the headline rate, a number of offsetting price changes caused inflation to stay on hold. Most notably, upward pressure from rising utility bills, fuel, and “miscellaneous goods” prices were offset by lower food, clothing, and transport services prices. There’s some uncertainty around the near-term outlook for inflation, given the high risk of further volatility in sterling and global oil prices in the near term. Nevertheless, we expect inflation to gradually head towards the Bank of England’s 2% target over the next couple of years, particularly as the impact of sterling’s post-referendum decline on prices fades further

Labour market statistics revealed that employment increased in the three months to September while unemployment remained low, with the rate at 4.1%. Nominal regular pay growth (excl. bonuses and before adjusting for inflation) was 3.2% on the year in the three months to September 2018, up by 0.1% points on August. Weaker inflation paired with stronger wage growth allowed real regular pay (excl. bonuses and adjusted for CPIH inflation) to increase by 0.9% on a year ago (on the less volatile three-month rolling basis) – the strongest growth in almost two years, but still weak relative to pre-crisis norms.