Summary:
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Preliminary GDP for Q3 matches expectations but unveils a worrisome structure
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UK could enjoy slower growth in the last three months of the year
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Pound stuck in a broader range, Brexit-related developments to steer the currency
The UK economy expanded 1.5% in annual and 0.6% in quarterly terms during the three months through September matching expectations. However, the structure of growth is weak and the rest of the data published today does not bode well for the last quarter. On the other hand, the trade data turned out to be the sole bright spot in an array of numbers released this morning.
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UK GDP grew in line with expectations but the rest of the data came in chiefly below expectations. Source: Macrobond, XTB Research
Solid headline but sluggish structure
Admittedly, the rate of growth matched expectations the breakdown unveiled some worrisome signs. Let’s begin with the simple analysis showing that the growth was driven almost solely by private spending and a slight contribution from net exports. A contribution from investment expenditure totalled exactly zero which seems to be in line with the latest projections presented by the Bank of England that the UK economy will experience no investment this year. Moreover, entering yet more detailed data one may arrive at a grim conclusion. Overall investment increased 0.8% QoQ which was the best result since the second quarter of the past year, however, the last quarter pick-up was boosted only by public investment with an increase of 8.6% QoQ. At the same time, the private sector saw an investment contraction of 1.2% QoQ. It allows us to draw conclusions that without general government spending investment would have had a negative contribution dragging on GDP as a whole. It does not bode well and implies fragile foundations standing behind the last quarter pick-up. In annual terms private investment was the lowest since the first quarter of 2016, just a quarter ahead of the Brexit referendum.
Private investment dwindled in the third quarter on the back of rising uncertainty related to Brexit. Source: Bloomberg, XTB Research
Gloomy outlook for the last quarter
Looking at the rest of numbers released this morning one may single out the sole bright spot - the much lower than expected trade deficit. In September the trade balance totalled -9731 million GBP easily beating the median estimate of -11395 million GBP. The data signals that the weak pound helped the UK economy erase the deficit to some extent. On top of that, industrial production was flat in annual terms while manufacturing production grew 0.5% YoY slightly exceeding expectations. Construction unexpectedly rose 3% YoY but it needs to be said that it was driven predominantly by government spending. Looking forward, the outlook for economic growth in the fourth quarter does not look well. The latest surveys for October showed sluggish results from services and manufacturing, and in the light of what is happening in Europe it is unlikely that manufacturing PMI will bounce back substantially in the final two months of 2018. Therefore, we see the rate of growth slowing in this quarter with still a subdued outcome from investment given the fact that the ongoing Brexit negotiations should weigh on business sentiment.
Range trading prevails
The pound barely responded to today’s data which was consistent with our assumptions presented this morning in the calendar post. From a broader point of view the GBPUSD remains stuck within a range between 1.3340 and 1.27 and this level seems to unlikely to be broken until the Brexit thread is closed altogether. Therefore, do expect swings within this range being driven by subsequently incoming revelations from both camps taking part in negotiations. Source: xStation5
