UK GDP posts modest growth in April but underlying trend is little better than flat
While yesterday’s data strongly suggested that the UK labour market remains very tight, this morning’s figures provided a reminder that UK economic activity can do little better than flat-line. As expected, following the drop of 0.3%M/M in March, GDP rose just 0.2%M/M in April. That left it unchanged from the average level in Q1 and up just 0.1%3M/3M and just 0.3% above the pre-pandemic level. Sectors that grew in March largely fell back in April, and vice versa, with momentum looking weak across the economy.
For example, while services sector activity grew 0.3%M/M in April, that followed a drop of 0.5%M/M the prior month to be still down slightly from the Q1 average. Thanks to a rebound in eating out and auto sales, consumer-facing services rose 1.0%M/M in April. But that followed a drop of 0.8%M/M in March and so they were still a hefty 8.7% below the pre-pandemic level. And industrial action in the public sector again took its toll in April, as healthcare services subtracted from growth due to strikes by junior doctors.
In terms of the other major sectors, despite a pickup in car production, weakness in other manufacturing subsectors (not least pharmaceuticals and IT goods) and North Sea oil and gas extraction meant that overall production fell by 0.3%M/M in April. That followed growth of 0.7%M/M the prior month and left it 0.2% above the Q1 average. Meanwhile, construction output fell 0.6%M/M following growth of 0.2% in March. And while that left it 0.4% above the Q1 average, the near-term outlook for building activity looks soft. Indeed, given the extra bank holiday in May for the King’s coronation, GDP likely fell further in May. While much-improved weather in the current month will have supported a rebound, we maintain our forecast that GDP will have failed to grow at all in Q2. And with significant further monetary tightening from the BoE seemingly now in store, the risks to growth over coming quarters look skewed to the downside, with non-negligible risks of recession in 2024 in particular.
Fed set to pause tightening cycle, focus on dot-plot and guidance for near-term policy path
All eyes today will be on the FOMC decision, where policymakers are widely expected to leave the FFR target range unchanged at 5.00-5.25%. The May FOMC meeting saw Chair Powell suggest that a pause in the tightening cycle might be appropriate to take stock of recent economic and financial market developments, as well as the lagged effects of the cumulative tightening implemented so far. Certainly, there were no nasty surprises in yesterday’s CPI report to prompt an immediate hike at this meeting. And today’s PPI figures are expected to show that producer prices fell in May for the second month out of the past three (-0.2%M/M), to leave the annual rate down almost 1ppt from 2.3%Y/Y in April and hence at the lowest rate since the start of 2021. Admittedly, signals on labour market developments have been mixed, with a surprisingly strong payrolls number in May but moderation in wage growth and jump in initial jobless claims last week. And so, the FOMC’s updated guidance, economic forecasts and dot-plot will be closely watched for signals on the likely near-term policy path, with the median expectation for the FFR for this year (and next) likely to be revised slightly higher from the 5.00-5.25% (and 4.25-4.50%) projection previously published in March.
Euro area IP to have risen in April, but will fail to reverse the weakness at the end of Q1
It should be a relatively quiet day in the euro area ahead of tomorrow’s ECB decision, with just the publication of euro area industrial production numbers for April due. While figures previously published from the largest four member states have been mixed – with zero growth in Germany, modest growth in France (0.8%M/M) and declines in Italy (-1.9%M/M) and Spain (-1.8%M/M) – the extremely sharp rebound in Irish output (21.4%M/M) should ensure we see seemingly-solid growth in production overall. But, while we forecast an increase of almost 1.0%M/M, this will fail to reverse the near-4%M/M drop recorded in March.