UK GDP up slightly in Q1, but down in March

Emily Nicol
Chris Scicluna

Stock rout continues in Asia and Europe as US CPI data resonate
Asian stocks followed yesterday’s ongoing US sell-off, where notably the NASDAQ fell a further 3.2% as the upside surprise to US core CPI additionally undermined sentiment. While Japan’s economy watchers survey suggested that optimists outweigh pessimists for the first time this year, the TOPIX fell 1.2% as the yen strengthened through ¥129/$. China’s CSI300 dropped a more modest 0.4%, although the discovery of two cases of Covid-19 in the Shanghai community dented hopes of an immediate relaxation of pandemic restrictions in the city. And the Hang Seng is currently down more than 1¾% as the HKMA bought the HKD to defend its currency peg for the first time since 2020. Major European stock markets have opened about 2-2½% lower this morning as the region’s natural gas prices leapt more than 10% on concerns of Russian supply cuts. And US futures are pointing ½-1% lower again too.

Post-CPI rise in yields short-lived; major govvies rally on risk aversion
Yesterday’s initial jump in UST yields following the CPI report was short-lived. 2Y yields are now down to 2.59%, some 15bps down from yesterday’s peak, with 10Y yields down below 2.85% more than 20bps down from yesterday’s peak. Euro area govvies have followed the global trend, opening notably higher (10Y Bund yields down 9bps so far this morning to 0.89%), with Gilt yields some 6-8bps lower across the curve as data confirmed a slight drop in UK GDP in March. In the Asia-Pacific, ACGB yields were some 5-8bps lower across the curve and JGBs were a touch firmer at the long end of the curve too.

UK GDP up 0.8%Q/Q in Q1, but down in March and extra weakness to come
At face value, UK GDP growth of 0.8%Q/Q might appear respectable, with the level of economic output pushed 0.7% above the pre-pandemic level in Q419 to be up 8.7%Y/Y. However, this was the softest pace in four quarters, and all the growth in Q1 came in January with the relaxation of pandemic restrictions. In contrast, following a downwards revision, economic output was unchanged on the month in February. And GDP dropped 0.1%M/M in March as services and industrial output retreated (both down 0.2%M/M) while construction provided some support (up 1.7%M/M). The weakness in February and March gives a taste of what to expect from now on. With real disposable incomes falling sharply, we forecast a slight decline in GDP in Q2 and – in the absence of extra government support for households – a further step down before year-end if and when the regulated energy price cap is hiked again in October. The weakness of the GDP outlook is one reason why we expect the BoE to end its tightening cycle after one further 25bps rate hike in August, and why we also expect inflation to fall back steadily over the coming year.

UK business investment maintains post-Brexit weakness, trade deficit rises to record high as exports drop again
Over Q1 as a whole, UK private consumption was up 0.6%Q/Q as households increased spending in hospitality and on clothes. But this component was still some 0.5% below the pre-pandemic level. Public investment also gave a boost to growth, up a rapid 23.6%Q/Q. But business investment remained very weak, down 0.5%Q/Q to be 9.1% below the pre-pandemic level and still more than 10% below the level in the quarter following the Brexit referendum in mid-2016. Government consumption also fell (-1.7%Q/Q) as the public health response to the pandemic was scaled back. And net trade subtracted more than 4ppts from growth as import volumes surged 9.3%Q/Q but exports plunged 4.9%Q/Q to be almost 20% below the pre-pandemic level. As a result, the trade deficit blew out to a record 5.3% of GDP. In part, this reflects the imposition of Brexit-related customs controls on shipments to the EU from January as well as distortions related to non-monetary gold transactions and data collection issues. Finally, inventory accumulation was estimated largely to offset the impact of net trade on GDP, adding 3.9ppts.

RICS survey points to strong UK house price growth (for now) as supply-demand imbalance persists
Despite weaker growth, the significant hit to households’ disposable incomes and recent increase in borrowing costs, the RICS residential survey reported another month of strong UK house price growth in April amid the ongoing supply-demand imbalance. The headline price balance jumped 6ppts to 80%, a ten-month high, with the respective balance in London (71%) the highest for more than eight years. But while surveyors remained broadly optimistic about prices over the coming three months, they were less upbeat about the outlook further ahead, with expectations for twelve months ahead the lowest since last June.

Supply-demand imbalance in UK labour markets continues to add upwards pressure on starting salaries
According to this morning’s KPMG and REC report on jobs, the UK labour market remains very tight. Recruitment continued to rise at a robust pace in April. But while the survey’s measure of demand was the strongest on the series, a shortage of candidates restricted growth in overall placements last month, with the respective index for permanent placings the lowest for thirteen months. The ongoing imbalance in the labour market continued to add upwards pressure to starting salaries, with the respective survey index only marginally softer than March’s survey record.

Japanese economy watchers see further improvement in April and point to a return to positive GDP growth in Q2
Today’s Japanese economy watchers survey was consistent with a further improvement in conditions at the start of Q2 and a likely return to positive GDP growth this quarter. The headline current situation diffusion index (DI) rose a further 2.6pts in April to 50.4, some 12½pts higher than February’s trough and more than 9pts higher than the Q1 average. Given the boost from the lifting of restrictions, household-related demand for services and food recorded further marked increases, with the respective DIs some 22½pts and 16½pts above the Q1 average. And while the corporate-related DIs remained firmly below the key 50-level indicating stable conditions, they still rose to the highest since December.

US PPI inflation set to ease slightly as energy inflation moderates
After yesterday’s data showed that CPI inflation eased less than expected in April, attention today will be on US producer price inflation. Prices of wholesale energy products likely eased in April after increasing at an average rate of 2.6% in the prior 12 months. But food prices are likely to remain under upwards pressure, with prices of other goods likely to reflect the impact of higher input prices and supply disruptions. Overall, producer prices are forecast to rise 0.5%M/M (vs 1.4%M/M in March), to leave headline PPI inflation down around ½ppt to a still-hefty 10.7%Y/Y.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at