UK GDP: No growth not as bad as it seems

20 June 2024

The economy didn’t grow at all in April, that’s not good news for the Conservative party election campaign, but it’s not as bad as it appears at first glance. There was always likely to be a bit of a hangover after a very strong performance in March and the wettest weather in more than a decade depressed activity in some areas. The underlying growth trend is still positive.  

We still think this is the start of a much brighter period for the UK economy than the last four years. Rising real earnings, tax cuts and lower interest rates will give households disposable income a significant boost in the second half of this year and a recovery in consumer confidence will ensure that most of that increase in income is spent. As a result, we expect a consumer-spending led economic recovery in the second half of the year and into 2025. 

Behind the data 

There were a number of one-off factors depressing growth in April. 

First, retail sales dropped by a massive 2.3% month-on-month (m/m). This is probably partly due to the absolutely soaking weather putting consumers off high street shopping, but also because Easter fell in March instead of April this year. 

Second, manufacturing was depressed by a huge drop in the pharmaceutical sector, as our chart below shows. Electrical equipment also sank 6.9% m/m. Bulk orders make both sectors volatile. Their m/m changes tell us nothing about the trend. In fact, the manufacturing trend is improving.

Third, construction dived 1.4% m/m, as rainfall 68% above the 1970-to-2023 average for April disrupted building work. Construction output will recover strongly if the incessant rain lets up.

All told, these rain-driven or erratic moves cut 0.4 percentage points from m/m GDP growth in April. Accordingly, we think GDP holding flat signals a strong underlying trend. Other businesses services categories, such as IT and finance, were a lot stronger. 

The GDP outlook

We think GDP will return to growth in May and June. Business surveys are pointing to stronger growth and consumer confidence has continued to improve. Given the strong run of growth this year, it now looks like GDP will come in at around 0.4% quarter-on-quarter in Q2, double the Monetary Policy Committee’s (MPC) forecast. That will make an August rate cut slightly less likely, but it is the inflation and wage data that the MPC will really focus on and that should have moved in the right direction by August, allowing the MPC to justify a rate cut. 

Looking further ahead, with the worst of the rates pain likely over, the question now is whether growth in Britain will stay on a higher trajectory following nearly two years of broad stagnation. The recovery in real incomes, the fall in energy prices, payroll tax cuts and easier funding conditions should all help support activity in the months ahead. But tight monetary policy will continue to drag on GDP, meaning gains are likely to average 0.3% in the coming quarters. 

We don’t think the result of the election will dramatically alter that outcome since both main parties have signed up to similar tax policies and fiscal rules, which will prevent them from substantially increasing taxes or borrowing, limiting their ability to impact on the economy over the next year or two.

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