Something of a new era in UK Gross Domestic Product or GDP measurement begins as we get a quarterly number after already receiving GDP data for two out of the three months. So in essence we will find out if Meatloaf was right about this.

Now don’t be sad
‘Cause two out of three ain’t bad.

The good news is that the extra two weeks or so mean that more data can be collected and so the quarterly number should be more accurate and less prone to revision. The not so good news is that if we look at the monthly data there are issues which look clear.

The month-on-month growth rate was flat in August 2018. Growth rates in June and July 2018 were both revised up by 0.1 percentage points to 0.2% and 0.4%, respectively.

Does anybody really believe we actually went 0.2% followed by 0.4% and then 0% in monthly terms?

Later we will receive the latest National Institute for Economic and Social Research or NIESR estimate which will be for October so it will be a busy day on the GDP front! Here is where they previously think we stand.

Building on the official data, our monthly GDP Tracker suggests that the economy will expand by 0.7 per cent in the third quarter and by 0.5 per cent in the final quarter of this year. This amounts to a growth rate of 1.5 per cent in 2018 as a whole.  The biggest surprise was from the production sector and, in particular,manufacturing output which expanded by 0.8 per cent. This strength was across the board and the outturn was above our forecast for the same period, partly because of changes to the back data.

If I was to post a challenge to that it would be concerning the rosy scenario for manufacturing when we know that the car/automotive sector has been and continues to struggle. It in my opinion is being hit by the diesel scandal and past stimuli for the sector as if you run a high you have eventually to have a bit of a hangover.

Forecasts

Yesterday we received the forecasts from the European Commission and Pierre Moscovici. If you are in the “bad boys (girls)” club then your punishment is to have your annual growth rate forecast at 1.2% as that was what was provided for the UK and Italy, Frankly that looks optimistic on current trends for the latter. The numbers are rather tight though as the Euro average of 1.9% is pulled higher by some smaller economies. Actually even a little by Greece but care is needed here as Pierre and his predecessors have been forecasting economic growth of 2% per annum since 2012 and therefore through a severe economic depression.

Today’s data

As it is a rare event I do not want to miss the opportunity to praise the Bank of England forecasters who suggested this earlier this month.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.6% between Quarter 2 (Apr to June) 2018 and Quarter 3 (July to Sept) 2018.

In one respect it was balanced.

All four sectors of output contributed positively to growth in Quarter 3 2018, with the largest contribution from the services industries at 0.3 percentage points.

If we look deeper we see this.

In the construction industry, output continued to recover following a weak start to 2018, which was in part impacted by the adverse weather. Output increased by 2.1% in Quarter 3 2018 – the fastest increase since Quarter 1 (Jan to Mar) 2017………Output in the production sector rose by 0.8% in Quarter 3 2018, following a decline of 0.8% in Quarter 2 (Apr to June). While output increased across all four main production sectors, around half of total production growth in Quarter 3 was driven by manufacturing……….In the services industries, output growth eased to 0.4% in Quarter 3 2018, contributing 0.3 percentage points to growth in GDP. This is in line with average rates seen since the start of 2017, following the relatively strong growth of 0.6% in Quarter 2 2018.

There are various messages here which have several impacts. Let me start with construction where we are building some new housing.

Q3 compared with Q2 is a rise of £872 million, primarily driven by a £507 million rise in private housing, offsetting the £162 million fall in commercial output. ( h/t @NobleFrancis ).

Then car production to which we will return later.

Transport equipment rose by 2.3% in Quarter 3, reflecting both a bounce back from a 2.7% fall in the previous quarter and strength in UK car exports in Quarter 3.

For once services did not take up all the strain and in fact growth there faded a bit with the sector most in boom, computer programming only rising 4.4% on a year before in spite of a strong quarterly performance of 2.2%.

Rebalancing

It is hard to type that word without thinking of former Bank of England Governor Baron King of Lothbury. The word that is as in fact the reality was much more elusive. However he will be cheering this from the ermine sidelines.

Net trade made the largest positive contribution to GDP growth in Quarter 3 2018 (0.8 percentage points), driven by a 2.7% rise in exports, while imports were flat……….The export growth in Quarter 3 reflects an increase in both goods (4.4%) and services exports (0.8%), with goods exports to non-EU countries growing more robustly than to the EU.

More power to their elbow and it is welcome that this mostly comes from goods exports as we have some detail on them as opposed to services where the numbers are even more of guess. Some of this will fade as we are back to the automotive sector but any ray of sunshine here is good and it was confirmed by the trade data.

The total trade deficit (goods and services) narrowed £3.2 billion to £2.9 billion in the three months to September 2018, due mainly to an improving goods balance.

There was also a bit of hope for wages which would have been included on Baron King’s rebalancing theme if he was thinking ahead.

This was driven by solid growth of 1.3% in compensation of employees (CoE), which contributed 0.6 percentage points to overall growth of nominal GDP.

This section was not all roses as export led growth is usually assumed to come with rising investment but not this time.

The rises in government and private dwelling investment were partially offset by a 1.2% decrease in business investment in Quarter 3. This was the sharpest decline since Quarter 1 2016.

 

Comment

Today’s GDP release shows that the UK economy pretty much reflected the weather in the third quarter of 2018. Not as hot perhaps but pretty good and for once the trade figures boosted it. Compared to our peers it was an especially good quarter as downbeat production data from France and Germany suggested that the 0.2% GDP growth for the Euro area might be revised down to 0.1% as if we look further it was 0.16%. In terms of our debt and deficit metrics it was also a good quarter as we can add in inflation there to get this.

Growth in nominal gross domestic product (GDP) strengthened for the second consecutive quarter in Quarter 3 (July to Sept) 2018, rising by 1.1%.

However there was a building issue which we have observed previously as we return to the automotive sector as promised earlier.

Trade of motor vehicles decreased by 6.2% in September, contributing negative 0.11 percentage points to GDP growth.

This troubled area is likely to further drag on trade and GDP in the fourth quarter, We can bring in the UK’s slowing monetary growth theme as well here to suggest a weaker fourth quarter and if we add in the Euro area’s problems then maybe a much weaker fourth quarter.

The monthly GDP numbers chime in with this theme if we look at them.

Monthly growth was flat in August and September 2018, following a downwardly-revised 0.3% month-on-month growth in July.

Frankly things are not going well for the monthly numbers as they are much too volatile but they too even allowing for that suggest a slowing.

I will be releasing my first weekly podcast this afternoon after the NIESR release as there is a lot to look at their including for example please be nice to any luvvies you see today. I just saw one and missed the chance.

Motion pictures grew by 9.3% in September, making information and communication the biggest contributor to monthly growth. The rise in motion pictures was due to broad-based growth within the sector.