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UK growth figures surprised to the downside, showing the economy shrank by 0.3% in October, below consensus estimates that looked for a 0.1% contraction.
That said, monthly estimates are volatile and today’s print follows an upside surprise in September of 0.2%, with the net result seeing the economy flatlining over the last three months. All in all, that sounds about right to us, given our base case for stagnant economic growth. Last month’s print notably outperformed the growth rate indicated by both retail sales and PMI data. As such, whilst there were modest upside risks to today’s release, we are not surprised to see a reversion to the mean either. Looking forward, however, growing real incomes and a pickup in the more timely PMI data suggests that an improvement in GDP readings is likely. Therefore, given this outlook and despite today’s undershoot, October’s figures are unlikely to cause too many worries with improving conditions rapidly coming into view.
Looking through the details of today’s release, the decline in activity was broad based, with declines recorded across the services, manufacturing and construction sectors.
Given the relative prominence of services in the UK economy, it is the first of these that was naturally key. The services index fell by -0.2% in October, with information and communication sub-index the single largest contributor (-0.13pp). The slowdown in activity was much sharper in the production sector, however, recording a -0.8% decline, led by manufacturing which contracted by a full -1.1% in October. This was perhaps the biggest surprise of the release, with UK manufacturing having held up relatively well in recent months, in contrast to European counterparts which have found themselves mired in a manufacturing recession for much of the year. What was not surprising was the slowdown in construction. Given the disruption caused by storm Babet, an output fall was widely expected, albeit at -0.5% this still undershot consensus projections.
Taken in isolation, this set of figures might look alarming, but we don’t think it should be cause for panic just yet.
Monthly GDP figures are notoriously volatile, and given the weather related disruption we are conscious of reading too much into a single month’s data print. Moreover, given that September’s 0.2% increase in GDP overshot expectations, this set a high bar to beat for this latest release. Indeed, the prior round of data came in much stronger than predicted by other measures of economic activity for the month, with retail sales ex-auto having declined by -1.0% in September and the composite PMI printing at 48.5. Whilst these rose to -0.1% and 48.7 in October respectively, the modest contraction in activity seen in today’s data looks more in line with those other activity readings.
Looking forward, however, there are more signs for optimism. Specifically, PMI readings jumped in November, with the composite measure returning to expansion with a print of 50.7.
In addition, with inflation falling rapidly in recent months, real wage growth is now well into positive territory. Average weekly earnings are now growing at an annual rate of 1.4% once adjusted for inflation, a significant turnaround from the sharp contraction seen earlier in the year. We expect this to support consumer activity into year end and through the beginning of 2024, suggesting that the worst now may be behind the UK economy when it comes to soft growth. Admittedly, markets seem a little more concerned by today’s release than we are, with sterling dropping two tenths on this morning’s data, and traders continuing to accelerate BoE easing bets. Given the improved outlooks into year end however, it seems unlikely to us that the MPC will be overly concerned, a point that we expect them to make in tomorrow’s policy statement.
Author:
Nick Rees, FX Market Analyst