The sharp decline in GDP in December is partly due to some activity being brought forward before the 31st October Brexit deadline. Nonetheless it leaves the economy on course to stagnate or contract by 0.1% q/q in Q4 as a whole. At the margin, that makes an interest rate cut a bit more likely.
GDP data make rate cut a close call
- The sharp decline in GDP in November is partly due to some activity being brought forward before the 31st October Brexit deadline. Nonetheless it leaves the economy on course to stagnate or contract by 0.1% q/q in Q4 as a whole. At the margin, that makes an interest rate cut a bit more likely.
- Admittedly, revisions to previous months meant the 3m/3m growth rate was a bit stronger than expected at 0.1% (consensus -0.1%), down from 0.2% in October. (See Table 1.) But the annual growth rate fell from 1.0% to a fresh seven-and-a-half-year low of 0.6%.
- Some of the fall in GDP in November was Brexit-related. Car production knocked 0.5ppts off manufacturing output due to car plant shutdowns as a Brexit contingency. Overall manufacturing output fell by 1.7% m/m. Services activity also fell, by 0.3% m/m. A drop in retail sales as Black Friday fell too late to be included in the figures was also a drag on the sector, but that should reverse in December.
- The impression that some of the fall in output in November was due to Brexit is backed up by the trade figures which showed a 7.8% m/m fall in imports, pushing the total trade balance from a deficit of £1.3bn in October to a surplus of £4.0bn in November. That strongly suggests businesses built up their inventories in October and didn’t need to buy as much in November.
- On a better note, the weakness in construction was revised away. The previous release showed construction output fell by 0.3% 3m/3m in October. This was revised up to +0.8%, rising to +1.1% in November.
- Overall, November probably wasn’t as bad as it looks, but there is very little momentum in the economy. It looks as though Q3’s 0.4% q/q rise in GDP was followed by a fall of 0.1% in Q4, or 0.0% at best. (See Chart 1.) That would be weaker than the Bank of England’s expectation of a 0.1% q/q gain.
- This is, of course, all old news so disappointing GDP in Q4 won’t seal an interest rate cut. In normal times, the MPC would already have cut rates. But it held off to see if the general election produced a revival in sentiment. What really matters is the data for January. At the moment, we think the MPC may hold off from cutting rates, but it will be a close call.
Chart 1: Real GDP
Sources: Refinitiv, Capital Economics
Table 1: GVA by Output (Components of GVA, %3m/3m Unless Stated)
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Andrew Wishart, UK Economist, +44 (0)20 7808 4062, firstname.lastname@example.org