United Kingdom: Economic growth remains fairly limp in Q2 despite a slight uptick
July 26, 2017
The UK economy’s performance in Q2 will hardly set pulses racing, despite a slight improvement compared to the first quarter, when growth was dragged down by weak showings from several consumer-facing industries in the service sector. According to preliminary data released by the Office for National Statistics (ONS) on 26 July, the economy expanded 0.3% in Q2 quarter-on-quarter (Q1: +0.2% quarter-on-quarter), matching analysts’ expectations. In annual terms, GDP grew 1.7% in Q2, up from Q1’s 2.0%. The UK’s fairly lackluster performance contrasts that of economies across continental Europe, many of which have picked up speed since the start of the year.
Looking at the sector-by-sector picture, the all-important service sector, which accounts for around four-fifths of GDP, grew 0.5% in the second quarter (Q1: +0.1% qoq). The figure was buoyed by retail trade, which remained surprisingly robust despite negative real wage growth, likely as a result of unseasonably warm weather in April and June and a late Easter. However, with inflation currently significantly above the Central Bank’s 2.0% target and negative real wage growth, the underlying picture is undoubtedly less flattering. The industry sector contracted 0.4% (Q1: +0.1% qoq), driven partly by a fall in the manufacture of motor vehicles. Despite the weaker sterling giving firms a competitiveness boost, this has yet to be translated into hard manufacturing data so far this year, which doesn’t completely square with the more encouraging PMI survey data, which shows manufacturing expanding at a healthy rate. Finally, the construction sector contracted 0.9% in Q2 (Q1: +1.1% qoq).
Looking ahead, the economy is going nowhere fast. With inflation set to rise further and brush 3.0% towards the end of the year, households’ purses will continue to be squeezed. If the deterioration in consumer sentiment observed after the election proves lasting, this could further dampen private consumption, while heightened political uncertainty relating to the development of Brexit negotiations will likely deter investors. In addition, government spending won’t pick up the slack, with Chancellor Phillip Hammond remaining committed to paring back the budget deficit.
Author: Oliver Reynolds, Economist