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UK reaction: UK exits recession with better-than-expected GDP growth

  • 10 May 2024 (3 min read)
KEY POINTS
The UK economy continued its recovery in March; monthly GDP was up 0.4%, above the 0.1% consensus. Q1 GDP also beat the consensus, rising by 0.6% quarter-on-quarter, compared to expectations of 0.4%
The monthly data was the source of the upside surprise; services output rose by 0.5% (consensus 0.0%) and industrial production was up by 0.2% (consensus -0.4%). Construction output, however, fell by 0.4% (consensus 0.5%)
More broadly, the recovery was the result of stronger households’ spending amid the recovery in real incomes and stronger demand underpinning a rebound in the manufacturing sector
Momentum is strong, and the composite Purchasing Managers’ Index remains consistent with growth of around 0.3% quarter-on-quarter in Q2. We have revised up our 2024 GDP forecast to 0.6%, from 0.4%
For now, we think the Bank of England’s Monetary Policy Committee will largely look through the strength in activity, as long as inflation and labour market data evolve as it expects. We continue to forecast the first rate cut in June

The UK economy has rebounded strongly from last year’s recession, as rising real incomes encouraged households to increase spending and industrial production began to recover. Indeed, March’s 0.4% GDP increase drove a stronger-than-expected 0.6% quarter-on-quarter in the first quarter (Q1). Forecasters had expected a smaller 0.4% rise, after declines of 0.1% and 0.3% in Q3 and Q4 2023, respectively. Growth beat the Bank of England (BoE) Monetary Policy Committee’s upgraded forecast of 0.4% quarter-on-quarter and now looks set to outperform the BoE’s forecasts for the year. It is important to remember that this is a first estimate and therefore is subject to revisions, but GDP now looks set to increase by 0.6% this year, compared to our previous forecast, and the BoE’s, of 0.4%.

The stronger-than-expected monthly increase was largely driven by a 0.5% rise in services output, with 10 of the 14 subsectors growing in March. Consumer-facing services saw growth of 0.7%, following a 0.1% fall in February, as households switched spending towards food activities and accommodation. Production also increased on the month, driven by a 0.3% recovery in manufacturing output. The bumpy recovery in the manufacturing Purchasing Managers’ Index in recent months suggests this should broadly continue over the next few months. Construction, however, continued to fall, due to a decline in new work and repair and maintenance, as elevated borrowing costs continued to weigh on the sector.

Looking at the expenditure breakdown, the recovery in households’ consumption was a key driver, likely supported by the ongoing recovery in real incomes; it rose by 0.2% quarter-on-quarter after two consecutive quarters of decline. The recovery was broad-based, with households ramping up spending in most areas, including on housing, water and fuels. Overall, consumer-facing services grew by 0.6% in Q1, driven by retail sales, despite the wet weather. Strike action, meanwhile, continued to influence government spending. Junior doctors did not strike in March, following a five-day walkout in February, spurring a 1.1% monthly rebound in human health and social work activities. As a result, government expenditure rose by a further 0.3% in Q1, after a 0.1% rise in the previous quarter. Finally, gross fixed capital formation rose by 1.4% quarter-on-quarter, reflecting a 0.9% increase in real business investment. 

A further recovery in real incomes - as pay growth continues to outpace CPI inflation and tax and benefit changes filter through – alongside rising confidence, falling interest rates and a fading mortgage hit, should support further increases in household consumption over the coming months. Today’s data also imply the household saving ratio edged down in Q1, given that nominal expenditure increased by 0.6% quarter-on-quarter, but employees’ compensation rose by a smaller 0.2%. While we don’t see a sharp drop, a further tick down will also support consumption.

Business investment, however, will likely hold broadly steady over the remainder of the year. Firms’ balance sheets are in pretty good shape but elevated borrowing costs will continue to make some projects unprofitable and businesses will probably want to wait to see the results of the General Election before going ahead. Overall, the strong start to the year means we have revised up our 2024 GDP forecast to 0.6% this year. Markets reacted modestly to the data, with sterling rising by 0.03% to $1.2536. 

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