UK GDP: December surge shows demand is intact

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.

Andrew Wishart

+44 20 3753 3017

Berenberg
60 Threadneedle Street
London EC2R 8HP
United Kingdom
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