UK GDP Preview (Mar 13): Fragility to Continue
Coming in lower than expected after taking account of downward revisions, and probably hit by industrial action, GDP shrank by 0.1% m/m in December data, a result that reflected the plunge in retail sales and abnormal weather that meant a Q4 drop in GDP and consumer spending. We see stagnation in the January figures, this actually extending through the whole of the current quarter so that a flat q/q Q1 GDP reading is also envisaged (ie a notch below BoE thinking) and with downside risks (Figure 1). Admittedly some upside risks are apparently posed by some survey data. However, the likes of PMI numbers have been very poor guides to GDP swings (Figure 2) and where the clear recovery already reported for January retail sales is likely to be offset by industrial action hitting health once more and by sharp fall in manufacturing (based around vehicles) and may be the impact of the record warm at the end of the month hitting utility. We see stagnation continuing this year, albeit with base effects still resulting in a modest GDP drop on average for 2024 and that partly dependent upon the BoE staring to ease as of Q2!.
Figure 1: GDP - Sliding or Stagnating?
Source: ONS, CE
Downside Risks Still Clear?
As for those swings, the December result and revisions meant a 0.3% q/q Q4 drop, both below the BoE’s flat projection and meaning that, after the Q3 decline, the economy entered formal but still modest recession. The underlying trend is one of stagnation given that GDP rose a bare 0.1% on average in 2023, albeit where per capita GDP fell for the seventh quarter in seven.
In terms of recent momentum, monthly GDP is estimated to have fallen by 0.1% in December 2023, following growth of 0.2% in November 2023 (revised down from a 0.3% growth) and a fall of 0.5% in October 2023 (revised down from a fall of 0.3%). GDP was flat in y/y terms all indicative of a flat underlying trend at best. Indeed, it could be argued that the weakness is more manifest as Figure I shows the extent to which the monthly level of GDP has fallen since last summer, ie down almost 1% from the aberrant July figure,
As for the larger than expected Q4 GDP drop, there was a fall in the volume of net trade, household spending and government consumption in Quarter 4 (Oct to Dec) 2023, partially offset by an increase in gross capital formation. It is unclear to what degree that the latter was inventory driven.
Figure 2: PMI Composite Survey - A Poor Guide to GDP Swings?
Source: Markit, ONS
As for the economic outlook, our relatively gloomy scenario may seem to be in conflict with survey data that have seemingly shown some degree of resilience in the last few quarters. Indeed, PMI data have perked up late but these numbers have been very poor indicators of actual GDP swings in recent years (Figure 2), especially the composite measure which excludes construction, government and retailing, perhaps the three sectors most affected by policy both monetary and fiscal. Even so, there are supportive factors: not least the marked drop in wholesale energy prices which will filter through in another bout next quarter and where the fiscal situation is going to be little more supportive than previously envisaged. But businesses are losing much of the energy support cushion through 2024. However, the main concern is clearly the impact of the sizeable tightening in monetary policy that is already causing tighter financial conditions that will increasingly bite the economy through the credit channel, this very much highlighted by unprecedented declines occurring in both the level of bank credit and bank deposits. This fragile outlook is very much led by the consumer, the most exposed to likely outright damage from the housing market. Admittedly, there are brighter signs regarding housing, but the level of transactions is still low and perhaps still falling, this being the main factor that will affect consumer spending.