UK Reaction: Bank holiday rebound
• Monthly GDP for October came in at 0.5%, above consensus expectations of a 0.4% rise.
• Output data for both September and October have been considerably impacted by the additional bank holiday for the Queen’s state funeral.
• Services output grew by 0.6% (consensus 0.5%) and was the main driver of October’s GDP growth. Industrial production (IP) remained flat (consensus 0.0%), whereas construction output grew by 0.8% (consensus 0.1%).
• The headline strength of these number should be read with caution; we had expected a considerable bounce back in activity following the additional bank holiday granted to mark the Queen’s funeral but underlying growth momentum remains weak.
• We continue to expect the Monetary Policy Committee (MPC) to raise Bank Rate by 50 basis points (bps) on Thursday to 3.50%. Concerns over the weakness of growth is likely to see some amongst the committee support smaller hikes.
Monthly GDP rose by 0.5% in October a touch above consensus estimates of a 0.4% rise. This follows growth in September’s GDP of -0.6%. Output data for both September and October have been considerably impacted by the additional bank holiday for the Queen’s state funeral. The recent bank holiday saw stores and restaurants close and less of a rotation to other goods and services as is the case with other bank holidays accentuating the impact on output in our view. Monthly GDP is now estimated to be 0.4% above levels prior to the pandemic.
Services output grew by 0.6% (consensus 0.5%) and was the main driver of October’s GDP growth. IP remained flat (consensus 0.0%), whereas construction output grew by 0.8% (consensus 0.1%) - the fourth consecutive increase in output this sector has seen.
The main driver of services growth was wholesale and retail trade which rose by 1.9%, following sharp declines in September. Human health activities which have been steadily increasing due to rises in COVID testing and vaccinations also contributed to the rise in services output. Consumer facing services rose by 1.2% in October following a 1.7% fall in September but output in consumer -facing services remains 8.9% below pre-pandemic levels.
Output fell in three out of the four IP sub-sectors; manufacturing rose by 0.7% on the month (consensus 0%) though this strength was not broad-based with 7 of its 13 sub-sectors seeing falls in their output. Electricity, gas, steam and air conditioning supply was the largest negative contributor to IP falling by 2.4% - including a 4.1% fall in the manufacture of gas. Evidence from the Department of Business, Energy and Industrial Strategy suggests that demand for gas and electricity in October 2022 was around 4% lower than it was in October 2021. This fall in demand is likely to be driven a combination of the higher than usual temperatures seen in October 2022, and lower demand resulting from higher prices.
What is next?
The headline strength of these number should be read with caution; we had been expected a considerable bounce back in activity following the considerable decline in output seen in September as a result of the additional bank holiday granted to mark the Queen’s funeral. The underlying activity in the UK economy remains weak, and we expect data from November and onwards to continue to confirm declines in output as the UK economy enters recession. We also see the rising risk that industrial action, with strikes and stoppages planned across health transport and postal networks across this month acts as a further drag on growth. We continue to forecast GDP growth of 4.3% this year and -0.7% next year.
Ahead of the Bank of England (BoE)’s MPC's meeting on Thursday, we expect it to raise rates by 50 basis points to 3.50% bringing the Bank Rate closer to where we see it peaking at 4.25% in March. We think that the BoE’s decision to increase rates by 75 bps in November was a one-off in the wake of the disastrous mini-budget and there was little in the recent Autumn statement that would see inflationary pressures much lower over the next two-three years to see a majority of the MPC support slowing the pace of hikes even further; but we also expect there to be considerable difference in opinion amongst those on the MPC, with the weakness in growth likely to drive some among the committee to support smaller increments of rate hikes or no further hikes at all.