GDP fell on the month in August, but thanks to solid increases in May, June and July any remaining concerns that the economy fell into recession in Q3 have been well and truly banished.
Recession fears banished, for the time being
- GDP fell on the month in August, but thanks to solid increases in May, June and July any remaining concerns that the economy fell into recession in Q3 have been well and truly banished.
- GDP fell by 0.1% m/m in August as we had expected (consensus 0.0%). The contraction was due to a 0.7% m/m drop in manufacturing output. There were hopes that car plants would stay open in August when they usually shut for maintenance, having already shut down in April in case there were a no deal Brexit, and provide a boost to the sector. But in the event car production rose by just 0.7% m/m in August. Services output was flat on the month while construction output rose by 0.2% m/m.
- Following a 0.2% q/q contraction in GDP in Q2, another fall in Q3 would put the economy in recession. But because of the 0.4% m/m rise in July (revised up from 0.3%) and the 0.1% m/m increase in June (revised up from 0.0%) there would now have to be a huge fall in GDP in September for the economy to contract in Q3. Indeed, even if GDP fell by 0.3% m/m in September, the economy would still grow by 0.4% q/q in Q3. As a result that is now our forecast, up from 0.3% q/q previously. (See Chart 1.)
- That suggests the surveys have been overly pessimistic. The all-sector PMI averaged 49.6 in Q3, suggesting the economy had contracted again. It’s not the first time the survey appears to have been dragged down by sentiment. It also fell sharply immediately after the referendum only for activity to prove resilient.
- What’s more, stockbuilding appears more muted than leading up to the March and April Brexit deadlines. The stocks of purchases balance of the manufacturing PMI was 49.8 in August and 53.6 in September compared to around 60 as a possible no deal Brexit neared in March and April.
- That said, it is true that the economy doesn’t have much underlying momentum. And the risk of a no deal Brexit every few months is weighing on investment and consumer spending. That’s why we have revised down GDP growth in our repeated Brexit delays forecast from 1.5% in 2020 to 1.0%. That might prompt the Bank of England to cut interest rates if Brexit is delayed again.
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 20 7808 4062, Andrew.email@example.com