UK Q2 GDP: Before the fall - RBS

Ross Walker, Research Analyst at RBS, suggests that this week brings the preliminary estimate of UK Q2 GDP and although numerous surveys have signalled a loss of momentum for some time – and growing anxieties ahead of the EU referendum – the official data remained surprisingly resilient in Q2.

Key Quotes

“There has been a growing divergence in recent months between deteriorating surveys and more resilient official output statistics. The trends in the surveys are likely to be more indicative of future conditions, as Brexit-related risks materialise – initially through postponed capex and hiring, subsequently through weaker consumer demand as labour market conditions deteriorate and wage inflation is squeezed further. For Q2 2016, however, the available official data point the other way, with upside risks around consensus forecasts at 0.5% (Bloomberg).

Our forecast is for GDP growth of 0.6% q/q, 2.2 % y/y, in Q2 2016. The output data already published show industrial production on course for growth of 1.5% q/q in Q2 (our forecast incorporates a 1.5% m/m fall in June).

On the official data, the industrial sector staged a rebound in Q2 following a contraction in Q1. We are sceptical that this expansion will persist in H2 2016, but barring major downward revisions the sector will report superficially solid growth in Q2. Moderate services growth so far in Q2, allied to undemanding base effects, suggests the predominant sector of the economy will achieve expansion of around 0.5% q/q in Q2 (this assumes a slowdown to just 0.1% m/m in both May and June).

Construction output, notoriously volatile on a month-to-month basis, is set for a c.1.0% q/q decline, but this is a small proportion of economic output and would not prevent overall GDP growth accelerating to 0.6% q/q. Growth is likely to slow sharply in Q3 and Q4 (0.2% q/q & 0.0% q/q on our forecast) so we would caution against reading too much into any pick-up in Q2.”