UK Reaction: Q1 rises by 0.1%, despite March slowdown
• Monthly GDP declined by 0.3% in March on the month, below Refinitiv consensus estimates of 0%. GDP growth for Q1 rose by 0.1% on the quarter, boosted by backward revisions to January’s GDP growth.
• A slowdown in retail activity in March pushed services output lower. Output also continues to be weighed by strike action.
• Services output fell by 0.5% (consensus 0%); industrial production (IP) rose by 0.7% (consensus 0%); construction output rose by 0.2% (consensus -0.2%).
• The quarterly profile of growth remains subdued with consumption unchanged over the quarter and inventories preventing output from contracting.
• We believe the Bank of England (BoE) has reached a peak of 4.5%, below market expectations for 4.75%, but with upside risks if labour markets continue to be resilient.
Monthly GDP declined by 0.3% in March on the month, below Refinitiv consensus estimates of 0%. GDP growth for Q1 rose by 0.1% on the quarter in line with consensus estimates but above our expectations of GDP remaining flat. Despite the miss in monthly GDP, the release came alongside upward revisions to January's GDP (up 0.1 percentage point to 0.5%), which kept quarterly GDP in positive territory. Industrial action continues to weigh on output across sectors, but March also saw a slowdown in retail activity which weighed further on growth.
Looking at the quarterly breakdown, private consumption remained flat following a 0.2% rise last quarter. Both imports and exports fell sharply (-8.1% and -7.2%, respectively). Business investment picked up by 0.7% in the last quarter for firms to take advantage of investment super-deduction and now stands close to its pre-pandemic levels (1.4% below levels seen in Q4 2019). Government expenditure declined (-2.5%) and the overall growth profile was supported by inventories.
In terms of monthly output, services output fell by 0.5% (consensus 0%) following February's decline of 0.1%. IP rose by 0.7% (consensus 0%) following last month’s decline of 0.1% (revised up from -0.2%) and construction output rose by 0.2% (consensus -0.2%) following last month’s rebound by 2.6% (revised up from 2.4%).
Services output continues to be weighed by strike action. March saw industrial action take place across sectors including education, the civil service, rail and healthcare; the level of output in these sectors remained subdued following sharp drops in February. The largest contribution to negative growth in services was a drop in vehicle repairs and IT services, which fell 1.4% and 1.1% on the month, respectively. Consumer facing services fell back following previous signs of a nascent pick-up. Output was likely impacted by the wetter-than-usual weather seen in March. Output in consumer facing services fell by 0.8%. The largest negative contribution came from the trade in vehicles; new car registrations this March were the strongest since 2019, but remained well below pre-pandemic volumes. Falls were also seen in retail sales (ex-vehicle sales) and slowing trade in pubs and restaurants.
Manufacturing rose by 0.7% on the month (consensus -0.1%) and was the largest contributor to growth in March. Growth was seen in most manufacturing sub-sectors, with pharmaceuticals output up 4% following two consecutive months of sharp falls. Increases in construction output was driven by an increase in new work. Sectoral surveys suggest this rebound was supported by an easing of inflation and material costs, but overall economic uncertainty is still seeing customers delay work.
Despite an upturn in activity indicators with PMIs pointing to a pick-up in services output, GDP continues to remain lacklustre, with signs pointing to broad-based weakness. Growth remained positive in Q1 but was driven by a rebound at the start of the year, since then growth has steadily declining. Looking forward the monthly growth profile is likely to remain bumpy: the additional bank holiday for the King's coronation will likely push output negative in May, with a rebound in June and the unwind of recent strikes could see growth pushed higher. But overall the picture is consistent with growth fluctuating around zero, with no meaningful pickup in growth momentum. The BoE's view of growth shifted up materially with the publication of its Monetary Policy Report yesterday. It expects growth to average 0% in both Q1 and Q2 of this year, so today's data already represents a small upside surprise in comparison to their expectations.
We think following the Monetary Policy Committee's decision to hike Bank Rate yesterday to 4.5%, we have reached a peak. Risks are tilted to the upside, and we think continued resilience in the labour market could see the BoE go further on rates. Next week's labour market data, notably measures of labour market tightness and pay growth, will give us a first indication of this. We are now seeing the first cut in February 2024 and see rates closing 2024 at 3.5%.