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GDP first quarterly estimate, UK: October to December 2018

11th February 2019

"GDP slowed in the last three months of the year with the manufacturing of cars and steel products seeing steep falls and construction also declining. However, services continued to grow with the health sector, management consultants and IT all doing well.

"Declines were seen across the economy in December, but single month data can be volatile meaning quarterly figures often give a better indication of the health of the economy.

"The UK's trade deficit widened slightly in the last three months of the year, while business investment again declined, now for the fourth quarter in a row."

Economic growth slows to 0.2% in Quarter 4 2018, as the annual increase in activity in 2018 is the weakest in six years

UK gross domestic product (GDP) is estimated to have slowed to 0.2% in Quarter 4 (Oct to Dec) 2018, slightly below the latest forecasts produced by the Bank of England (PDF, 4.27MB) and the National Institute of Economic and Social Research (PDF, 317.7KB). Following a pickup in activity over the summer months - in part due to warm weather and the World Cup - real GDP growth slowed markedly in the final quarter of 2018, with GDP falling by 0.4% in the month of December. Construction, production and services output fell in the month, the first time that there has been such a broad-based fall in monthly output since September 2012. Previous analysis showed that estimates of monthly GDP can be volatile in nature, with almost one in every four months in the past 21 years showing negative GDP growth, although the more stable rolling three-month figure points to an underlying slowing in the UK economy. More information on the monthly estimates of GDP can be found in the GDP monthly estimate, UK: December 2018 publication.

Compared with the same quarter in the previous year, the UK economy is estimated to have grown by 1.3%. It has not been weaker since Quarter 2 (Apr to June) 2012 and continues its relatively subdued performance over the last year. Today's estimates also provide the first snapshot of how the economy performed in 2018, showing that UK GDP increased by 1.4%, the weakest it has been since 2009.

Growth of services output eases in Quarter 4, as manufacturing and construction output fall

The output measure of gross domestic product (GDP) increased 0.2% in Quarter 4 (Oct to Dec) 2018. There has been a slight easing in services output growth to 0.4%, following a relatively strong performance throughout the summer months. Production output fell by 1.1% - its largest decline since Quarter 4 2012 - including a 0.9% fall in manufacturing output. Following two consecutive quarters of growth, construction output fell by 0.3% in Quarter 4. The annual figures for 2018 show that there was a slowing of growth in all three of these industries. Services output increased by 1.7% in 2018, it was last lower in 2010, while there has also been a notable easing in growth in the production and construction industries.

Services output growth slowed to 0.4% in Quarter 4, reflecting a slowdown across a number of industries. This was also seen in the December 2018 UK Services Purchasing Managers Index (PDF, 158KB), which noted that survey respondents commented that "Brexit-related concerns were a key factor weighing on business-to-business spending at the end of 2018", as business activity rose at one of its slowest rates over the previous two and a half years. In addition, wholesale and retail trade slowed to 0.5% in Quarter 4 2018, following growth of 1.2% in the previous quarter. The latest official figures show that retail sales fell by 0.2% in the three months to December 2018, continuing the slowing in the underlying three-month trend as the boost seen throughout the summer months continues to wane. This is echoed in the recent British Retail Consortium figures who recorded flat retail sales in the year to December.

There has been a 0.6% increase in business and financial services in Quarter 4, driven by an increase in the professional, scientific, administration and support services and real estate industries. This has been corroborated in the latest Bank of England Agents Summary of Business Conditions (PDF, 1.40MB), which reported that demand for business and financial services had continued to grow at a modest rate, as "sectors such as commercial property, recruitment and business advisory services reported that demand had been more resilient than they expected".

In the production industry, output fell by 1.1% in Quarter 4 2018, marking the weakest quarterly growth since Quarter 4 2012. The decline reflects falls across all main areas of production (Figure 3), which is the first such occurrence since the first quarter of 2009. The 0.9% fall in manufacturing output in Quarter 4 was broad-based with ten of the thirteen manufacturing industries experiencing a contraction in activity. Manufacturing output of transport equipment fell 2.7%, in part reflecting the partial closures of multiple car manufacturing plants. The fall in transport equipment is also echoed in the recent Society of Motor Manufacturers and Traders survey. The fall in production was attributed to "regulatory changes and ongoing uncertainty over future diesel policy and taxation, which were exacerbated by declining consumer and business confidence". Today's monthly figures show that manufacturing output has now fallen for six consecutive months, which last happened in late 2008 and early 2009 at the time of the financial crisis. Despite this, in Quarter 3 (July to Sept) 2018 we continued to see a small increase in growth in manufacturing output of 0.2%, in part due to a weaker base period in Quarter 2 2018.

There was also a fall of 1.4% in mining and quarrying, which broadly reflects higher than usual levels of output over the summer months. Elsewhere, electricity, gas, steam and air output fell by 2.0% in Quarter 4, in part reflecting a strong performance in the previous quarter. Above average temperatures in the final three months of the year may have also played a role in the overall slowdown in production of the energy industry.

In the construction industry, output fell by 0.3% in Quarter 4, primarily reflecting a sharp 2.8% fall in December. This monthly fall reflected a 6.8% fall in new private housing work and a 5.9% fall in non-housing repair and maintenance. There also have been revisions to the monthly path in 2018, including downward revisions to the figures for October and November 2018 - see Construction Output in Great Britain: December 2018 for more information. The latest Bank of England Agents Summary of Business Conditions (PDF, 1.4MB) highlights that activity in the construction industry remains modest, while the Construction Purchasing Managers' Index slowed in December, with signs of heightened uncertainty weighing on new orders.

Business investment falls for the fourth consecutive quarter

The expenditure measure of gross domestic product (GDP) increased by 0.2% in Quarter 4 (Oct to Dec) 2018. Private and government consumption contributed positively to GDP growth, while the quarterly falls in gross capital formation (GCF) and net trade explain the slowing in the quarter. The extent of the slowdown of the contribution of private consumption in recent years, which likely reflects the effect of a squeeze in purchasing power. It also shows the positive contribution of gross capital formation in 2018, although this reflects movements in inventories and valuables, as gross fixed capital formation was flat last year. Having provided a boost to GDP growth in 2017, net trade fell in 2018 - a possible reflection of the waning effects of sterling's depreciation and a slowing in momentum in the global economy.

Household consumption increased by 0.4% in Quarter 4 2018, broadly in line with the subdued quarterly growth rate experienced over 2017 and 2018. The relatively muted growth in household consumption was also noted in the latest Bank of England Agents' Summary of Business Conditions, which noted that "uncertainty related to Brexit and subdued housing market activity weighed on demand". It also reported that there had been evidence that Black Friday sales had failed to meet expectations, though some of this may have reflected that less spending had been brought forward from December. The GfK Consumer Confidence figures in December found that consumers were much less confident at the end of the year, with its reading at its lowest for more than five years.

Government consumption increased by 1.4% in Quarter 4 2018, primarily reflecting an increase across general public services and defence spending. Expenditure in these areas has been lower across this financial year compared to previous years, however, the latest estimates show that there has been a pickup in such spend.

Gross fixed capital formation fell by 0.5% in the final three months of 2018 and was flat over the year - the first time that there had been no increase in capital investment since 2009, in which the UK was in the midst of the effects of the financial crisis. There were continued falls in investment in transport equipment in Quarter 4, although these estimates can be volatile. Early estimates of business investment can be prone to revision, but today's estimates show it fell by 1.4% in the final quarter of the year. This is the fourth consecutive quarter in which such capital expenditure has fallen, the first such instance since 2009 (Figure 6). Compared with the same quarter in the previous year, business investment fell by 3.7% - the largest fall since the first quarter of 2010. In the latest Inflation Report, the Bank of England observe that this weakness appears to "primarily reflect Brexit and associated uncertainty". This subdued picture has been corroborated in a range of business surveys, many of which cite the effect of heightened uncertainty. The Quarter 4 Decision Maker's Panel highlights Brexit as one of the top sources of uncertainty, while the latest Deloitte CFO Survey reports that perceptions of uncertainty continued to rise in the final quarter of 2018, while the outlook for capital expenditure has deteriorated.

To see more with charts and links to other sources go to -

https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpfirstquarterlyestimateuk/octobertodecember2018

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