United Kingdom: Economic growth accelerates in Q2 but remains modest
The economy found its feet in the second quarter of 2018, according to preliminary data released by the Office for National Statistics (ONS) on 10 August. Quarter-on-quarter growth came in at 0.4% in Q2, up from 0.2% in Q1 and matching FocusEconomics’ and market expectations. However, at least part of the uptick can be attributed to the unseasonably warm weather, which supported retail sales and could have also given construction a boost. According to the ONS, the economy’s underlying growth rate continues to slow. In annual terms, the economy grew 1.3% in the second quarter, up slightly from 1.2% in Q1.
On a GDP-by-production basis, the service sector picked up speed, largely thanks to the wholesale and retail trade, and transport storage and communications sub-sectors. In addition, the construction sector bounced back from a contraction in Q1 which was driven by weather-related disruption. In contrast, the manufacturing sub-sector shrank and subtracted from growth, as manufacturing export growth waned.
In terms of expenditure, GDP benefited from a 0.3% quarter-on-quarter increase in private consumption in Q2, up from the 0.2% expansion in Q1. The improvement was likely driven by the warmer weather, although private consumption remains sluggish as real wage growth was minimal. Fixed investment improved substantially in the second quarter thanks to a recovery in business investment (Q2: +0.8% quarter-on-quarter; Q1: -1.3% qoq). However, Bank of England data shows that Brexit uncertainty continues to weigh on firms’ investment decisions. Meanwhile, government consumption expanded 0.4% in Q2, unchanged from Q1’s rate.
The external sector weighed on economic activity in Q2: Exports declined 3.6% from the previous quarter, down from Q1’s flat reading, on fewer car exports and as the impact of the weaker sterling since the EU referendum dissipates. With imports contracting 0.8% (Q1: -0.2% qoq), the external sector detracted 0.8 percentage points from growth, the worst outcome since Q3 2016.
The quarterly GDP release for the second quarter is the first under the ONS’s new publication schedule. There will now be only two quarterly GDP releases, with the second, comprehensive estimate to be released 85 days after the end of the reference quarter.