The week ahead: GDP wasn’t as bad as it looked
18 November 2024
Looking at the latest economic growth figures is a bit depressing. The economy contracted by 0.1% month-on-month (m/m) in September, which dragged down overall growth in Q3 to just 0.1%. That’s a far cry from the average of 0.6% quarter-on-quarter (q/q) in the first half of the year. What’s more, the economy has only grown in two out of the last six months. It also means Kier Starmer has his work cut out for him to keep his pledge to make Britain the fastest growing economy in the G7.
But dig a little deeper and things aren’t nearly as bad as Friday’s figures made out.
The parts of the economy that we really care about actually did pretty well last quarter. Consumer spending rose 0.5% q/q after gaining 0.2% in Q2. Government spending rose by 0.6% q/q and business investment by 1.1% q/q. In an encouraging sign of business confidence, corporate investment rose 1.2% q/q, and 4.5% year-on-year (y/y), the strongest annual gain since 2023 Q1. This is especially important because business investment plays a key role in boosting productivity and allowing the economy to grow more quickly in the future.
So, what went wrong?
Firstly, growth was never going to keep up the pace in the first half of the year when it was being flattered by a rebound from the recession at the end of 2023. But growth in Q3 was dragged down by a -0.5 percentage point contribution from net trade and inventories. That tells us nothing about the wider economy, and instead reflects the UK’s role as a gold trading hub. In September, the economy was dragged down by a huge 2% drop in output in the IT sector. But output in this sector is volatile and will probably bounce back in Q4.
Where now?
The strong increase in consumer spending suggests that the big increase in household’s real incomes this year is finally starting to feed through into spending. Further real wage growth and interest rate cuts should support this over the next year. Admittedly, October might look a little weak due to nervousness ahead of the budget, but this should be partially offset by people bringing activity forward ahead of the budget. Overall, we’re expecting growth to rebound to 0.3% or even 04% in Q4. That would leave growth this year around 1%. As the big increase in government spending kicks in next year growth should rise to 1.8%.
Finally, we doubt that the weakness in growth in Q3, given it was largely driven by erratic components, will tempt the Monetary Policy Committee (MPC) into another rate cut in December. We'll have to wait until February for the next rate cut.
- Inflation to rebound
- Budget might deter spending
Inflation to rebound
Headline CPI inflation likely accelerated in October, to 2.1% from 1.7% in September. The Bank of England (BoE) pencilled in a reading of 2.2% in its November forecast.
The rise in the headline rate will be driven by a 9.5% rise in household energy bills. Prices fell by 7.1% at the same point in 2023.
Services inflation, which is a key metric for the BoE, will likely hold steady at 4.9%, 0.1 percentage point below the BoE’s forecast. Airfares and hotel prices have been particularly volatile of late and could drive a surprise to our forecast. The BoE would almost certainly look through any large price swings in either category.
The bigger picture is that services inflation is likely to ease gradually from here, supporting the case for the BoE moving slowly. We think it will hold rates steady in December before cutting at a quarterly pace in 2025.
Budget might deter spending
Consumer caution ahead of the Autumn Budget likely saw UK retail sales dip in October.
The deterioration in the GfK consumer confidence survey in September and October highlights how households have been downbeat despite real wage growth.
The government’s warnings about “difficult decisions” ahead of the budget on October 30 may have made households reticent to spend.
While spending in supermarkets may have rebounded, we expect buyers of big-ticket items to have decided to wait for Black Friday discounts.
Above-average temperatures in October may also have contributed to a delay in the purchase of winter clothes.
Still, household consumption was the chief driver of growth in the third quarter. We expect consumer spending to pick up further ahead, bolstered by the removal of uncertainty around the Budget, seasonal concessions, the November rate cut and ongoing increase in real wages.
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