UK GDP missed expectations in Q3

Chris Scicluna
Emily Nicol

UK GDP up less than expected in Q3, leaving BoE December rate call balanced
While UK GDP grew a touch firmer than expected in September, up 0.6%M/M, that followed a downward revision to growth in August (down 0.2ppt to 0.2%M/M) and a contraction in July (-0.2%M/M). As a result, over Q3 as a whole, UK GDP rose 1.3%Q/Q, down from 5.5%Q/Q in Q2 and 0.2ppt lower than the Bloomberg consensus forecast. More importantly perhaps, growth in Q3 was also 0.2ppt below the BoE’s central growth projection, a deficit that seems unlikely to influence the balance of views on the MPC one way or the other - next week’s labour market data (and the following set next month) would seem likely to be more important in determining whether or not the majority votes for a hike on 16 December. In addition, the quarterly level of UK output last quarter was still some 2.1% below the pre-pandemic level. UK growth also therefore fell some way short of the euro area (2.2%Q/Q) and each of the five largest member states, but outpaced the US (0.5%Q/Q). And the shortfall of GDP from the pre-pandemic level in Q419 in the UK looks to have been greater than any other G7 country.

Services led the way as pandemic restriction eased further; manufacturing and construction soft
As in the euro area, UK growth in Q3 was again led by services as activity rebounded upon the relaxation of pandemic restrictions. Growth in that sector of 1.6%Q/Q in the third quarter followed a leap of 6.5%Q/Q in Q2 to leave the level of activity just 0.7% below the pre-pandemic level. Within the detail, hospitality was especially vigorous, up 30%Q/Q, with arts, recreation and entertainment up almost 20%Q/Q. In contrast, retail and wholesale trade output dropped 2.5%Q/Q on lower sales of goods, with retail sales down each month of the quarter and car sales also far weaker. Beyond services, production rose 0.8%Q/Q thanks to a jump of more than 26%Q/Q in mining and quarrying output on the reopening of North Sea sites previously closed for maintenance. But manufacturing output fell 0.3%Q/Q, led by declines in rubber and plastics, but due to a sharp drop in September production of autos also fell 0.3%Q/Q, as supply-chain difficulties took their toll. And supply bottlenecks also weighed on construction activity, which fell 1.5%Q/Q.

Consumption main driver but business capex subdued and net trade very weak
On the expenditure side, household consumption was predictably the main driver, increasing 2.0%Q/Q, nevertheless still some 4.4% below the pre-pandemic level. A jump in spending on restaurants and hotels (30.9%Q/Q) and transport (4.5%Q/Q) was partly offset by lower spending on household goods and services (-9.6%Q/Q), and clothing and footwear (-7.7%Q/Q). In addition, fixed investment rose 0.8%Q/Q with government investment up 4.3%Q/Q but business investment still subdued, rising just 0.4%Q/Q. Meanwhile, government consumption rose 0.9%Q/Q due to increased spending on healthcare, including vaccinations. Net trade subtracted 1.1ppt from GDP growth in Q3 as export volumes fell 1.9%Q/Q due to a steep drop in goods shipments of 5.8%Q/Q, with shipments of machinery and transport goods significantly weaker. But import volumes rose 2.5%Q/Q led by fuels, chemicals and certain other goods.

Monthly production-side data suggest smaller shortall from pre-pandemic level
Underlying inventories were also judged to be weaker on supply-side strains but contributed positively to quarterly growth seemingly due to arithmetical idiosyncrasies. Indeed, the difficulties reconciling the estimates of growth based on expenditure and output were also highlighted by the monthly data for September. Based on these output-based indicators, growth of 0.6%M/M in September left GDP just 0.6% below the pre-pandemic level in February 2020, a much smaller shortfall than implied by the quarterly expenditure figures, which are nevertheless the basis for the BoE’s forecasts.

Healthcare the main driver of growth in September
Within the detail, growth at the end of Q3 was underpinned by a 0.7%M/M increase in services activity. That was mainly due to a sizeable boost in healthcare activity on the back of a large rise in face-to-face GP visits and the vaccine and test and trace programmes, which together contributed 0.4ppt to the 0.6%M/M growth in GDP in September. But principally reflecting weak wholesale and retail sales, output in consumer-facing services fell 0.6%M/M to remain 5½% below the pre-pandemic level. And overall, having merely moved sideways in July and August, services output remained 0.6% below the February 2020 level in September. Meanwhile, industrial production (-0.4%M/M) remained hindered by a sizeable drop in the distribution of gas, while autos output fell 8.2%M/M (admittedly following a cumulative increase of almost 20% over the previous three months). Overall, IP remained 1.4% lower than in February 2020, with the shortfall in manufacturing an even steeper 2.5%. And while construction output rose for the first month in three in September (1.3%M/M), it remained 1.0% below the pre-pandemic level.

UK house prices buoyed by demand and supply imbalances in October
Beyond the GDP data, the overnight release of the RICS residential survey signalled that strong UK house price growth had been maintained in October despite the tapering of the government’s stamp duty holiday at the end of September and rising expectations that interest rates would rise over the near term. Indeed, the headline balance (79%) was a touch firmer than in September and only 11ppts below the peak in June. This reflected the ongoing imbalance between supply and demand in market, with new buyer enquiries having risen to their highest since May but inventory on estate agents’ books near record low levels. Against this backdrop, surveyors remained relatively optimistic about their expectations for house prices over the coming three months, with sales expectations only a touch below the long-run average too. Of course, it remains to be seen whether this optimism is maintained once the first rate rise materialises.

Japanese goods PPI inflation jumps to highest rate since 1980 but CPI inflation unlikely to be pressured significantly
After yesterday’s stronger-than-expected US and Chinese inflation numbers, the overnight release of Japan’s goods PPI also exceeded expectations, as the upwards trend in commodity prices and the weaker yen pushed manufacturers costs significantly higher. Indeed, producer prices jumped 1.2%M/M in October, which, excluding the impact of the consumption tax hikes, was the second-strongest rise since the series began in 1980. So the annual rate jumped 1.6ppts to 8.0%Y/Y, a record high.

Within the detail, prices for petroleum and coal products surged 7.9%M/M, to be 44.5% higher than a year earlier. Prices of nonferrous metals were also up 4.1%M/M (31.4%Y/Y), while lumber prices rose a further 3.6%M/M (57.0%Y/Y), nevertheless the smallest monthly increase since April. Once again, price increases were underpinned by imported products, with prices in yen terms up 4.1%M/M, the most since February and almost twice the pace in contract currency terms. Prices for domestic products were nevertheless also up 1.1%M/M (7.9%Y/Y). While raw and intermediate material costs continue to rise at a faster pace, overall final consumer goods prices also stepped up last month, by 1.1%M/M, to leave them more than 4% higher than a year earlier, the largest such increase since 1981.

Of course, Japanese goods prices at the CPI level are inflating at nowhere near that rate (non-energy industrial goods inflation was still down 0.1%Y/Y in September), with retailers either unable or unwilling to pass on the rise in input costs, at least for now. And overall consumer price inflation remains weighed by the especially sharp drops in mobile phone charges too. Indeed, while headline CPI inflation rose 0.6ppt in September to its highest reading since January 2020, it merely reached 0.2%Y/Y – a different world to rates currently seen in Europe let alone the US. Moreover, the BoJ’s preferred core CPI rate (excluding fresh foods and energy) remained firmly in negative territory (-0.5%Y/Y), while the internationally comparable core measure of inflation (excluding food and energy) slipped back in September to -0.8%Y/Y. And core CPI inflation seems unlikely to peak significantly higher than 1%Y/Y over the coming quarters.

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