UK GDP growth remains sluggish
Latest figures from the Office for National Statistics show the UK economy saw a small pick-up in GDP growth, but the overall environment remains sluggish.
The preliminary estimate shows second quarter GDP growth at 0.3% compared to 0.2% in the first quarter, and matching consensus expectations.
To put the recent growth figures into context, the first half of the year grew by 0.7% compared to the previous six months, which is the slowest half-yearly growth rate since the start of 2013.
Services sector still driving growth
Despite the government’s efforts to “rebalance the economy”, the preliminary estimate shows that the services sector generated almost all of the growth recorded.
Meanwhile the wider production sector and the construction sector both contracted. Clearly, the depreciation in the pound has not significantly changed the fortunes of manufacturers.
The biggest contribution within services came from the retail trade sub-sector, which is a slight concern given the squeeze on household incomes. As the retail trade sector includes both retailers and wholesalers, it is not clear whether there was a pick-up in consumption through retail sales, or just a rise in inventories.
Higher household spending suggests the savings rate may have fallen even further from the record low recorded in the first quarter, which is surely unsustainable.
Meanwhile, if there is a build-up in inventories, then there should be a fall in output in the future as destocking will be required.
Some improvement expected in second half of 2017
Overall, the latest figures are as expected, highlighting the weakness in the economy post the Brexit referendum. We forecast some improvement in the second half of the year as inflation starts to abate, but we doubt growth will return to above trend levels for at least a year.
This suggests that employment growth should slow, and the unemployment rate may start to rise. Interestingly, the claimant count, which was once the preferred measure of unemployment by the government, has been rising in recent months.
Looking ahead to the next Bank of England meeting on 3 August, we think there is now a very low chance of a rise in interest rates. The weakness in growth combined with the recent downside surprise in inflation should calm the committee’s hawkish tendencies.