Investment Clock insights

UK Q1 GDP growth respectable… but bumps and doubts under the surface

Melanie Baker

10 May 2019

UK Q1 GDP came in at a very respectable 0.5%Q in Q1, faster than Q4’s 0.2%Q.  That was in line with consensus.  So far so good. However, beneath the surface the story was murky and the monthly profile bumpy.  

Brexit preparations will have affected this data and the decent performance over Q1 partly reflects the contraction in the economy seen in December (providing a low base for the quarterly comparison).  Monthly GDP growth has slowed since January and GDP growth actually contracted in March (-0.1%M).  With Brexit and the UK political outlook still uncertain, let alone recently rising levels of risk around the global outlook (US-China tensions and new tariffs), UK GDP growth is likely to slow again in Q2. Hard to read data will help keep the Bank of England on hold for now too.

Good news comes with caveats:  Consumer spending, business investment and government spending all grew and more than expected, but the Office for National Statistics (ONS) commentary accompanying the release was heavy on caveats, noting for example several discrepancies with other sources of data.  

Consumer spending grew 0.7%Q.  The ONS write-up notes a pick-up in retail sales over the quarter (1.6%Q), but also note that this “is at odds with a variety of external survey evidence”.  

Government consumption grew 1.4%Q, reflecting “widespread growth in a number of areas including health… and other functions of central government, such as general public services and economic affairs”.  Given the government will have stepped up Brexit preparations in Q1, it is worth considering that Brexit may have been a distortive factor here. 

Fixed investment was strong, up 2.1%Q in Q1, mainly reflecting government investment (+8.1%Q).  Better news was arguably business investment breaking its run of contractions, growing 0.5%Q (consensus: -0.7%Q).  However, investment intentions remain weak (as flagged by the ONS too) and that the ONS note “higher levels of uncertainty in this release, reflecting the introduction of International Financial Reporting Standard (IFRS) 16”, making some adjustment for the potential impact of this in the GDP figures.  

More bumps and distortions in other components too: Net trade was a big drag on GDP growth, inventories a boost. This will have been the case even after excluding the impact of movements in ‘non-monetary gold’ (which can move the UK trade data around quite a lot period to period).  However, some of the strength in imports and boost to stock-building will have reflected Brexit preparations – as reflected in recent business surveys too.  

Charts 1 and 2: Bumpy monthly profile, with GDP contracting in March

Source: Thomson Reuters Datastream as at 15/03/2019

Chart 3: Distortions in the data, but decent contributions to growth from consumer spending and investment (with caveats)

Source: Thomson Reuters Datastream as at 15/02/2019

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.