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UK GDP figures out this morning revealed a surprise 0.2% economic expansion in September, just enough to keep the economy from contracting in the third quarter. This comes despite many UK watchers, including ourselves, looking for a modest -0.1% QoQ fall in activity in Q3.
In our view following weak activity in July and only a modest rebound in August, the bar to escaping a contraction overall appeared high. Nevertheless, a recovery in services activity was enough to tip the balance and prevent the economy shrinking in the third quarter, welcome news given recent signals suggest the UK economy may have continued to slow. Someone might want to mention this to sterling, however, with the British pound seemingly unmoved by the better-than-expected news. Given recent signs of a slowing economy had been weighing on GBP, it is surprising that today’s positive growth news is not seeing a reversal. Even so, we do still expect this growth data to ultimately be sterling supportive, as it becomes increasingly apparent to markets that the UK economy is set to outperform their European neighbours, in line with our longstanding call.
Heading into today’s release, a string of weak PMI numbers and soft retail sales data had suggested that even a flatlining economy would be too much to look for in Q3.
Whilst the September figures only needed to show growth of 0.2% MoM, this still seemed unlikely. Retail sales in particular softened notably in September, contracting by -1.0% when excluding fuel costs, against an expectation for just a -0.4% fall. In a heavily consumer driven economy such as the UK, this suggested soft consumer demand would necessarily weigh on growth figures. That said, the composite PMI printed at 48.5 in September, only fractionally down from the 48.6 August reading, suggesting a repeat 0.2% GDP print was not out of the question. It appears that, relative to our expectations, a pickup in services activity in September is largely responsible for today’s above consensus print. Whilst the services index contracted by -0.1% in Q3 overall, 0.2% MoM growth in September was better than the zero-growth expected by markets. Combined with a flatlining manufacturing sector in Q3 and a 0.1% QoQ expansion in construction activity in the same period, this seems to have been just enough to prevent the UK economy from shrinking outright.
Looking forward, the -0.4% contraction in real household expenditure seen in Q3, would at face value appear to be a concern, as would the sharp -4.2% drop in business investment.
We do not expect either of these falls to be repeated in Q4, however. In the latter case though, this only reverses an unusually large jump in Q2. In the former, whilst the fall in household expenditure tallies with the soft retail sales seen over the quarter, we think weather likely played a significant impact in both July and September, suggesting a rebound is likely in Q4. Moreover, with inflation having fallen rapidly and wage growth softening but not in outright collapse, rising real incomes should see household expenditure improve over coming quarters too. All in all, we see this as signalling positive signs ahead for the UK economy, avoiding contraction in Q3 and showing signs that this should be sustained into year end, though recession cannot yet be entirely ruled out. While this has failed to see the pound stage a recovery as of yet, we suspect that better growth conditions relative to Europe where a recession looks increasingly likely, should see appreciation pressure for sterling over coming weeks and months.
Author:
Nick Rees, FX Market Analyst