Investment in United Kingdom

United Kingdom - Investment

Economy avoids recession in Q3 but remains frail

The UK economy dodged recession in the third quarter, growing 0.3% in quarter-on-quarter (qoq) seasonally-adjusted terms and contrasting the prior quarter’s 0.2% contraction. The Q3 figure was in line with the FocusEconomics Consensus Forecast. In annual terms, growth slumped to 1.0%, down from Q2’s 1.3% year-on-year expansion and marking the lowest figure since Q1 2010.

Private consumption continued to underpin activity amid low unemployment and solid wage rises (Q3: +0.4% qoq; Q2: +0.3% qoq), while government spending rose modestly (Q3: +0.3%; Q2: +1.1%). Contrastingly, fixed investment fell 0.2% in Q3 on lower public investment, less severely than Q2’s 0.9% contraction. A further inventory drawdown—following Q1’s significant stockpiling in preparation for a possible no-deal Brexit—also dragged on growth.

Exports grew 5.2% quarter-on-quarter in Q3, rebounding from Q2’s 6.6% contraction, despite adverse global trading conditions and soft momentum in the Eurozone. Meanwhile, imports grew 0.8%, contrasting Q2’s fall of 13.0%, with soft import figures in recent quarters largely reflecting an unwinding of stocks. As a result, the net contribution from the external sector was 1.2 percentage points, following Q2’s 2.6 percentage-point contribution.

Looking ahead, growth is likely to remain muted in the near term as continuing political uncertainty dampens activity. While solid private consumption should continue to prop up the economy, recent signs of ebbing momentum in the labor market—if they prove long-lasting—could begin to chip away at consumer spending. Uncertainty regarding the outcome of the UK’s exit from the EU is the key risk to growth going forward.

According to James Smith, an economist at ING, while “the ongoing distortions of Brexit continue to make the figures hard to read […] All in all, we think the economy is probably growing at a pace of roughly 0.2% per quarter.”

In its November inflation report, the Bank of England reiterated its 2020 growth forecast of 1.3% and slashed the 2021 forecast to 1.8%. Our panelists see the economy growing 0.9% in 2020 and 1.4% in 2021.