15 June 2023
UK GDP Growth will pick up in the second half of the year but not by much
The 0.2% month-on-month (m/m) rebound in GDP in April failed to fully reverse the 0.3% m/m drop in March and means the UK economy is still essentially flatlining. Growth should pick up a little in the second half of this year as households’ real incomes start to rise, but the impact of higher interest rates will ensure that growth remains mediocre at best.
The news that growth was just 0.1% in the three months to April probably won’t make much difference to the chances of a rate hike at the Bank of England meeting next week. The inflation data on Wednesday will have a bigger impact, but it would take a huge downward surprise to bring a pause back onto the table.
Behind the data
The positive story was really in consumer facing services where output in rose by 1.0% in April, more than reversing March’s 0.8% drop. This rebound was enabled by the boost to households' real disposable income from the 10.1% increase in the value of benefit payments, which helped many to cope with ongoing rapid increases in prices.
However, construction output fell by 0.6% m/m in April, led by a 1.0% decline in new work, as the impact of higher borrowing costs rippled through to new housing demand. What’s more, ongoing strikes in the public sector also have continued to weigh on GDP. Output in the health sector fell by 0.9% m/m, driven largely by an increase in the number of days junior doctors went on strike. Admittedly, this hit was offset largely by a 0.8% recovery in output in the education sector, as teachers in England were on strike for only one day in April, down from two in March.
Indeed, our measure of the real economy, which strips out much of the public sector, rose by 0.3% m/m and is now 1.9% above its pre-pandemic peak compared to 0.7% for the whole economy.
There are reasons to think growth will pick up in the second half of this year. Inflation will more than halve from its current levels, which combined with strong wage growth means that households’ real incomes will start rising again. What’s more, most consumer and business surveys, including the RSM UK MMBI , suggest that business and consumer confidence has improved.
However, rising mortgage rates will cost households at least an additional one percentage point of their disposable incomes over the rest of this year, and even more if interest rates rise to 5.5%, as financial markets expect. That will offset much of the impact of real income growth.
Overall, we expect the economy to flatline in Q2, and then meagre growth of 0.1% and 0.2% quarter-on-quarter in Q3 and Q4 respectively. So, even though a recession isn’t our base case, it wouldn’t take a much stronger headwind, either from higher interest rates or a weakening global economy, to put one back on the cards.