UK Reaction: A subdued bounce-back in growth

GDP rose by 0.2% in July following a fall of 0.6% in June just below consensus expectations of a 0.3% rise, with the UK economy posting a modest bounce-back in activity following the additional bank holiday in June. Over the three months to June GDP remained flat compared with the previous 3 months.

Output in services grew by 0.4% in line with consensus estimates, the rise in services was the main contributor to July’s growth. Industrial production and construction output declined on the month, marking the second consecutive month of declines in this sector. Industrial production output fell by 0.3% (consensus 0.3%) and construction output fell by 0.8% (consensus 0.5%), respectively. Within the services sector, growth was driven by information and communication (+1.5%) and health care and social work (+0.8) as GP appointments continue to rise. Output in consumer-facing services rose by 0.6% in July bolstered the UK hosting the Women’s EURO and Commonwealth Games. Manufacturing output rose across almost all sub-sectors, posting a 1.4% rise overall.

Last week’s fiscal package remans pivotal to the growth outlook, the package which is set to total over £130 billion will support real incomes boosting growth and will likely be enough to prevent the economy slipping into a prolonged recession as we had previously been forecasting. At the same time as the UK mourns the death of the Queen, the additional bank holiday that has been granted for her funeral could see growth shift lower than we had initially expected this quarter, increasing the risk that the UK slips into technical recession this quarter. We had pencilled in growth of 0.3% prior, but the adjustment we have seen historically for additional bank holidays has seen growth hit by around 1.5% on the month This scale of hit to GDP would see growth of -0.4% over the quarter, tipping the UK into technical recession following the 0.1% decline recorded in Q2.

Following the announcement of the energy bills support package, we increased our Bank Rate forecasts; we now expect rates to reach 3.5% by year end. Whilst the package is set to reduce headline inflation, the boost to growth it will provide leaves the Bank of England with more to do to ensure inflation returns to target. We expect the BoE will hike rates by 75 basis points (bps) in their September meeting and by 50bps in both November and December.