UK GDP: A two-speed economy

A mixed bag: Volatile monthly GDP was always likely to struggle to follow the large 0.4% mom jump in December with a further increase in January. In the event a worsening contraction in the manufacturing sector dragged GDP down by 0.1ppt, explaining all of the 0.1% mom fall in total GDP. That was weaker than the consensus forecast of +0.2% mom but only slightly lower than our call of 0.0% mom. Even so, on a less volatile three month on three month basis (3mo3m) growth picked up from 0.1% in th December to 0.2% in January. The poor performance of the more export-intensive industrial sector marked a contrast with increasing momentum in services output – see Chart 1. The latter is more reliant on domestic sales. That highlights a divergence between robust domestic demand but weak exports as the UK struggles to compete in international markets. See “UK: trade helps explain economic stagnation”, published 28 January.

Manufacturing struggles: Although mining also contracted, the main driver of the 0.9% mom drop in industrial production was a 1.1% mom contraction in manufacturing output. The UK’s manufacturing malaise had matched similar struggles in neighbouring European economies, but the decline in January was a disappointment given Eurozone industrial output rose in the same month. The PMI survey suggests this underperformance could worsen: the Eurozone manufacturing output balance edged up towards 50 in February, but the UK index slumped to 47.3. High energy costs (even by European standards) and rising labour costs are hurting the competitiveness of UK manufacturers in the international market. Meanwhile, construction output slipped back for a second month in a row. We suspect the sector will go through a soft patch until demand for new homes recovers from the tax changes coming into force on 1 April. See “UK: why has housing construction slumped?”, published 13 March.

Consumer strength: Total services output increased by 0.1% mom in January. Although it was a weaker month for hotels and restaurants, the big picture is that consumer spending is healthy. After struggling due to high inflation and interest rate hikes, consumer-facing services output is growing again – see Chart 2. The increase in annual growth from 0.2% yoy in December to 0.3% yoy in January lifted it to the fastest pace since early 2023. Note that with pay growth running at 6% and inflation at 3% consumers are enjoying a sizeable rise in real incomes at a time they are already saving a lot in aggregate. That suggests real consumer spending growth will remain robust, but also that companies will have sufficient pricing power to pass on much of the increase in labour costs they are facing. Therefore, despite oil and gas prices easing off recently, we remain confident that CPI inflation will average just over 4% yoy in the second half of the year. Separately, we think sustained growth in the dominant (80% of GDP) services sector will offset the weakness in construction and manufacturing. Therefore, we forecast that quarterly GDP growth will rise from 0.1% qoq in Q4 2024 to 0.3% qoq this quarter.

Chart 1: Services gain momentum, manufacturing struggles

In % and contributions in ppt, output in the latest three-month period compared to the previous three (%3mo3m). Sources: Haver, Berenberg.

Chart 2: Consumer-facing services GDP

Wholesale and retail trade, transport, accommodation, food and drink services, rental property, veterinary activities, travel agency, gambling, sports and recreation, personal services and household staff output included. Sources: ONS, Berenberg.

Andrew Wishart

+44 20 3753 3017

Berenberg
60 Threadneedle Street
London EC2R 8HP
United Kingdom
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A big surprise: The unexpected surge in activity in December lifted quarterly GDP growth to 0.1% qoq in Q4 (consensus: -0.1% qoq) and will put talk of a technical recession to bed. A rise in services output supported by signs of a strengthening in consumer spending over Christmas raised GDP by 0.4% mom in December, well above the consensus forecast of a 0.1% mom increase in output. This will reassure the Bank of England that the economy is not suffering from a sudden slump in demand, and therefore reduces the chance of an interest rate cut at the next meeting on 20 March. Admittedly, the expenditure breakdown flags some cause for caution, with government spending and volatile stockbuilding rising the most. But, looking ahead, we expect supportive consumer fundamentals and increasing government consumption to help quarterly GDP growth pick up further from 0.1% qoq in Q4 to an average of 0.3% qoq this year.

No sign of consumer collapse: Soft consumer sentiment did not hold consumers back from spending over the festive period. Consumer-facing services output grew by 0.4% mom in December helped by a 2.0% mom increase in food and beverage service activities. The rise in output was not all down to the consumer, however, as total services output also increased by 0.4% mom. That raised rolling quarterly services output growth to 0.15% 3mo3m following several months of stagnation (see Chart 1). As the services sector accounts for 80% of UK output, that will need to continue if GDP growth is to pick up to 0.3% qoq and reach our forecast of 0.9% yoy for the full year of 2025. Meanwhile, the 0.8% 3mo3m fall in industrial output in Q4 masks a better December, in which a 0.5% mom increase in output partially reversed the fall over the previous three months.

Reason for caution: The first estimate of the expenditure breakdown for Q4 was less encouraging than the output data. Domestic demand continued to expand, but that was exclusively due to increases in government spending and stock building. Admittedly, given the strength of consumer facing services at the end of the quarter, it seems likely that household spending will be revised up over time. Meanwhile, net trade remained a major headwind (see Chart 2). But the trade deficit has already widened from 1.5% of GDP to 3.5% over the past year and a half, so we think that much of the adjustment to the past appreciation of the pound against the euro is now behind us. Therefore, solid domestic demand should allow the economy to gain some momentum this year.

Chart 1: Growth ticks up

In % and contributions in ppt, output in the latest three-month period compared to the previous three (%3mo3m). Sources: Haver, Berenberg.

Chart 2: Rising domestic demand offset by weak trade

Percentage-point contributions to quarter-on-quarter GDP growth. Excludes trade in valuable metals. Sources: Haver, Berenberg.

Andrew Wishart

+44 20 3753 3017

Berenberg
60 Threadneedle Street
London EC2R 8HP
United Kingdom
For Berenberg the protection of your data has always been a top priority. Please find information on the processing of personal data here.
Any e-mail message (including any attachment) sent by Berenberg, any of its subsidiaries or any of their employees is strictly confidential and may contain information that is privileged or exempt from disclosure under applicable law. If you have received such message(s) by mistake please notify the sender by return e-mail. We ask you to delete that message (including any attachments) thereafter from your system. Any unauthorised use or dissemination of that message in whole or in part (including any attachment) is strictly prohibited. Please also note that any legally binding representation needs to be signed by two authorised signatories. Therefore we do not send legally binding representations via e-mail. Furthermore we do not accept any legally binding representation and/or instruction(s) via e-mail. In the event of any technical difficulty with any e-mails received from us, please contact the sender or [email protected]. Deutscher disclaimer.

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For Berenberg the protection of your data has always been a top priority. Please find information on the processing of personal data here.
Any e-mail message (including any attachment) sent by Berenberg, any of its subsidiaries or any of their employees is strictly confidential and may contain information that is privileged or exempt from disclosure under applicable law. If you have received such message(s) by mistake please notify the sender by return e-mail. We ask you to delete that message (including any attachments) thereafter from your system. Any unauthorised use or dissemination of that message in whole or in part (including any attachment) is strictly prohibited. Please also note that any legally binding representation needs to be signed by two authorised signatories. Therefore we do not send legally binding representations via e-mail. Furthermore we do not accept any legally binding representation and/or instruction(s) via e-mail. In the event of any technical difficulty with any e-mails received from us, please contact the sender or [email protected]. Deutscher disclaimer.

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