UK GDP slips in 2019Q2: a correction, not recession
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the GDP data for 2019Q2:
- GDP fell by a greater-than-expected 0.2% (QOQ) in 2019Q2, after the 0.5% rise in 2019Q1.
- GDP in 2019Q1 was boosted by preparations for the initial Brexit Day (29 March), including very substantial stockpiling. GDP in 2019Q2 was dragged down by major destocking, as well as partial closures of various car manufacturing plants (annual shutdowns brought forward).
- Of the other expenditure components, household consumption rose 0.5% (QOQ) in 2019Q2, compared with 0.6% in 2019Q1, whilst general government final consumption increased by 0.7% (QOQ). Gross fixed capital formation slipped 1.0%, within which business investment was down 0.5%, after a 0.4% increase in 2019Q1. Net trade showed a marked improvement, mainly reflecting lower imports.
- Concerning the industry breakdown, services growth was a weak 0.1% (QOQ), whilst production contracted by 1.4% and construction fell by 1.3%.
- It should be noted that early GDP estimates are prone to revision.
- Concerning prospects for 2019Q3, NIESR is expecting a rise in GDP of 0.2% (QOQ). July’s retail sales rose by a better-than-expected 0.2% (MOM), to be 3.3% higher YOY.
Concerning other data:
- GDP was flat (MOM) in June, within which services were also flat (MOM).
- The trade deficit fell by £16.0bn to £4.3bn (current prices) in 2019Q2, mainly reflecting a dramatic fall in imports following sharp increases in 2019Q1, prior to the initial Brexit Day.
- The labour market remains robust, on the whole. Employment rose by 115,000 (QOQ) in 2019Q2 to 32.81mn, a record high. But the unemployment rate inched up to 3.9% (still the lowest since early 1975). Vacancies have slipped a little in recent months but remain near record highs.
- There have been employment increases over the past year in a wide range of industries (including manufacturing and education), but employment has fallen in others – notably “wholesale, retail, motor repairs”.
- Average earnings are picking up. In 2019Q2, they rose by 3.7% (YOY, total pay) and 3.9% (YOY, regular pay). In real terms, they rose by 1.8% (YOY, total pay) and 1.9% (YOY, regular pay).
- Productivity growth remains very weak, but it partly reflects the robust growth in employment.
- CPI inflation picked up modestly in July to 2.1% (YOY), whilst producer prices inflation also picked up in the month. However, inflationary pressures still seem well contained.
- House prices inflation remains subdued, prices rose just 0.9% (YOY) in June. London remains the worst-performing region, with prices down by 2.7% (YOY).
Finally, the Chancellor announced there would be a “fast-tracked one-year Spending Round”, completed in September, to fund departments’ FY2020 activities. A full multi-year Spending Review will be held in 2020.
Ruth Lea said, “…after the release of the 2019Q2 GDP data, there was speculation that the UK economy was falling into recession. But the fall in the second quarter should be seen as a correction to the first quarter, which was boosted by preparations prior to the initial Brexit Day (29 March). There was a huge swing from large stock-building in the first quarter, to almost as large destocking in the second. NIESR expects 0.2% GDP growth in 2019Q3 which, though speculative at this stage, seems reasonable. If so, then the economy would not fall into recession as defined in the conventional sense of two consecutive quarters of declining GDP. But even if there were some slippage in 2019Q3, this would not, in itself, herald the sort of recession we experienced in the mid-1970s, the early-1908s, the early-1990s and the Great Recession, when there were significant losses of output and rising unemployment.”