UK suffers World Cup hangover

The Office for National Statistics (ONS) reported that the UK economy grew by 0.7% in the three months to August compared to the previous three months. This was slightly better than the Thomson Reuters consensus of 0.6% growth.

The figures show a strong rebound from the start of the year, when heavy storms disrupted travel, construction and logistics.

However, the details of the latest set of figures are less promising for the near future. Monthly growth in August fell to zero compared to a strong 0.4% expansion in July. It seems that the World Cup may have encouraged spending during July, but the party ended abruptly the following month.

This is supported by the latest retail sales figures which show the volume of sales slowing from 0.9% month-on-month in July to just 0.3% in August.

Chart of UK GDP growth

Weaker growth for every sector in August

Within the details of the report, every major sector saw some deterioration in growth in August. Growth in services activity was flat in August, down from 0.3% in July, while construction output contracted by 0.7% compared to 0.5% growth previously. The production sector in aggregate grew by 0.2% (down from 0.4%), but the manufacturing subsector contracted by 0.2% (previously flat).

Are Brexit fears weighing on growth?

Overall, the headline GDP figures mask some underlying weakness. On a quarterly basis, even if GDP stalls again in September, growth for the third quarter would be 0.6%, which would be the best quarter of growth since the end of 2016. However, it would mean potentially a weak end to the year.

In our last look at the expenditure breakdown of GDP, we found that final sales were actually in recession, as final demand had not kept up with output, meaning that the economy was building inventories. The lack of growth in August may be in response to this. Then again, it could also be in response to the rise in fear over a no-deal or cliff-edge Brexit following the announcement of the government’s Brexit proposals, dubbed Chequers.

If the slowdown is Brexit-related, then it is likely to have persisted through September, and could potentially last for a few more months yet.