UK Growth in Focus 

This morning showed UK GDP come in at 0.2% growth on a month-on-month basis for August, meeting market expectations and marking a considerable improvement from the previous contractionary print of -0.6%. The rise in economic output was aided by growth in the services sector which saw 0.4% growth, thus rebounding following a fall of 0.6% over July. Driving growth in the services sector was professional, scientific, and technical activities which expanded 1.2% over the month. The rise in growth here helped to soften the fall in output of consumer-facing services which dropped by 0.6%, following a slowdown in sporting events and spending on recreation.

The picture was also gloomy for UK production, where output contracted by 0.7%. This came as the ONS also downwardly revised production output in July 2023 from -0.7% to -1.1%. Here, manufacturing slumped 0.8% with the ONS noting that 13 sub-sectors experienced a drop in output over the month. Sticking with production, the ONS also noted that “Mining and quarrying was the only production sub-sector to see increased output in August 2023, growing by 2.9%, driven by growth of 3.5% in the extraction of crude petroleum and natural gas”.

Regarding construction, this morning indicated that the services sector fell by 0.5% in August following a drop of 0.4% in July 2023 (upwardly revised from a 0.5% contraction). Here, the ONS noted that “five out of the nine sectors saw a decrease on the month, with the main contributors in new work coming from private commercial, and private housing, which decreased by 4.1% and 1.4%, respectively.”

This monthly GDP print follows last month’s Q2 GDP data release which indicated that the ONS now estimates the size of the UK economy to be 1.8% greater than pre-pandemic levels. This is above that of Germany (whose economy is 0.2% larger than before Covid-19) and France (whose economy is 1.7% larger). Nevertheless, the UK’s post pandemic growth has however remained softer than that of the US, Canada, Italy and Japan.

This morning’s UK GDP print follows the IMF’s report into UK growth with projected that the country is set to have weakest growth among G7 over 2024. The IMF downwardly revised their 2024 growth forecasts for the UK economy from 1% to 0.6% citing monetary conditions, while organisation also projected growth over 2023 to be the second weakest, after Germany. Here, the IMF stated that “the decline in growth reflects tighter monetary policies to curb still-high inflation and lingering impacts of the terms-of-trade shock from high energy prices”.

Looking at the IMF’s report more generally, the Fund stated that it was too early to take comfort in the post-pandemic rebound and inflation easing across developed economies. The IMF indicated that “Economic activity still falls short of its pre-pandemic path, especially in emerging market and developing economies, and there are widening divergences among regions”. The fund continued by stating that a number of factors were subduing the recovery, including longer-term consequences of the pandemic, the Russian-Ukraine conflict, and “increasing geoeconomic fragmentation”.  Other factors that the IMF cited were “the effects of monetary policy tightening necessary to reduce inflation, withdrawal of fiscal support amid high debt, and extreme weather events”.

Accordingly, the IMF are now forecasting that Global growth will slow to 3% over 2023 (from 3.5% in 2022) ahead of easing to 2.9% in 2024. These projections remain below the historical (2000–19) average of 3.8%, and are indicative of how the global economy faces numerous headwinds.

Yesterday’s release of the Federal Reserve’s minutes indicated that the majority of FOMC members were supportive of one more rate hike ahead of achieving their terminal rate. All members of the FOMC also agreed that the Fed’s monetary policy ought to be restrictive for some time to ensure that inflation gets down to their 2% target level. As usual, the minutes indicated that policy maker’s views would be data dependent, and the document indicated that “a vast majority of participants continued to judge the future path of the economy as highly uncertain”. As such, the minutes indicated that there remains considerable uncertainty around the Fed’s next moves in light of greater uncertainty around US economic growth. Hence, the Fed’s minutes have identified how policy makers are “supporting the case for proceeding carefully”, as eyes turn to the Fed’s next rate decision on 1 November.