United Kingdom: The economy contracts in Q4
GDP fell 0.3% on a seasonally adjusted quarter-on-quarter basis in Q4 (Q3: -0.1% s.a. qoq), undershooting market expectations of -0.1% and marking the weakest outturn since Q1 2021. On an annual basis, the economy fell 0.2%, compared to the previous period’s 0.2% growth. Due to the disappointing Q4 data, the economy recorded just 0.1% annual growth over 2023 as a whole, the second weakest reading in the G7.
Private consumption fell 0.1% s.a. qoq in Q4, government consumption was down 0.3% and exports fell 2.9%: These three components were responsible for the overall decline in GDP. Weak consumer sentiment and high interest rates likely weighed on private spending, while industrial action in the health sector could have dampened government spending, and exports were weighed down by lower services exports.
In contrast, fixed investment rose 1.4% s.a. qoq in Q4, aided by higher business investment.
Our Consensus is for the economy to record tepid growth in Q1 2024, though activity will continue to be constrained by high interest rates.
ING’s James Smith cautioned that the economic panorama is not as poor as Q4 GDP data makes it seem:
“The fourth-quarter fall seems to largely boil down to a couple of main drivers, one of which was the sharp fall in retail sales at the end of last year. We think will be reversed in the first couple of months of 2024 and may reflect changing seasonal patterns in spending that aren’t fully adjusted for in the data. The fourth quarter was also hugely volatile for manufacturers, with an unusually sharp fall back in October. That was fully reversed by December, but overall across the fourth quarter, output was down. The flip side of that is that even if manufacturing stays flat in the first quarter, flattering base effects mean it’ll most likely positively contribute to GDP this quarter.”