GDP and the output side composition

Starting with GDP, three of the last four quarters showed a quarterly growth of 0.4%. The only exception has been the first quarter of 2018 when the “Beast from the East” created a few problems for builders, exporters and also some other service and manufacturing sub-sectors. In that occasion, the final result was a meagre 0.2% growth.

Even if growth returned to the same level as in the last quarter of 2017, the structure of sectors’ contributions changed quite a bit.

Manufacturing had a very bad start of the year after a roaring 2017 and, if data are confirmed, it is in technical recession (two quarters of negative growth).

On the other side, construction recovered in Q2 after the terrible first quarter of the year which has seen Carillion collapse and the above cited problems related to bad weather. This should help those manufacturing sectors that mainly work for construction (rubber and plastics, non-metallic minerals, basic metals and electrical equipment).

Services also had a very good quarter after two soft readings. The sector clearly enjoyed the very good and sunny weather we enjoyed since April and also the football World Cup which pushed up food and pub/restaurants sales.

Even if some of the dynamics in terms of sector output have changed, the overall picture remains stable as well as our forecasts for the whole UK economy. In our latest Manufacturing Outlook we confirmed a 1.2% and 1.3% expansion in 2018 and 2019.

Consumers re-building savings and concerned about the UK future

In the previous paragraph we analysed GDP on the output side. Let’s now have a look at the expenditure one starting from the biggest component: private household consumption.

Consumption has not seen a quarterly contraction since the second quarter of 2013, however its performance has been quite subdued in recent times. In the last four quarters the average quarterly expansion was 0.28% versus the 0.43% average in the period post financial crisis.

As we highlighted in our previous macro-forecasting blog, consumers are not ready to splash out money and this is confirmed by the Gfk consumer confidence indicator which has been negative for the last 29 months. In particular, consumers are not confident about the general economic situation which is by far the most negative component of the Gfk index.

Moreover, savings remains extremely low and, even if disposable income is trending positively thanks to a (small) real wages pick-up, consumers are keener on filling-up their piggy bank rather than going out and spending big money.

Overall, our predictions for private consumption remain broadly unchanged with 1.0% and 1.1% annual growth in this year and the next.

Slow investment is not a new development

As we said several times, 2017 was a great year for UK manufacturing and for the world economy. Developed countries heavily invested in new machineries to keep up production levels and improve their productivity, however the same cannot be said in the UK.

Investment has contributed positively to growth in 2017 with a 1.6% expansion in the year. However this is much lower that we would have expected considering last year’s expansion, the well-known production capacity constraint and, overall it’s far from the investment level registered in the other developed economies.

As the graph shows, Brexit uncertainties put a big brake on investment with companies investing the minimum to keep operations going but not more than that.

Our forecast is for a modest 0.9% expansion for this year and 1.0% in the next one.

Growth yes, but not risk-free

The macro forecast shows a subdued but still resilient picture, however this is not risk-free.

On one side the economic cycle is slowing down all over the world, with the exception of the US where the cycle is still at an earlier stage and it should have peaked in Q2 2018. Overall, we are still seeing healthy levels of growth but they are clearly down from the second half of 2017.

If this is normal in the “boost and bust” cycle picture, other risks are unique to this specific moment.

The first one is clearly represented by Brexit which has already slowed down investment and consumer confidence and it might have very heavy consequences on our integrated supply chains and international trade.

The second is about the Trump’s administration with its policies of economic sanctions and trade wars. On this last topic, the fear is that the situation may escalate quickly and that the situation won’t be just a fight between China and the US.

WATCH: The 2018q3 EEF/BDO Manufacturing Outlook survey summary