UK Output Misses Expectations with Economy Shrinking Over September

This morning preliminary figures from the ONS indicated that UK GDP grew 0.1% on a quarterly basis over Q3, missing market forecasts and making a meaningful slowdown from the first two quarters of the year.

Against expectations of 0.2% monthly growth over the course of September, the size of the UK economy in fact contracted 0.1%. This represented the first construction since April and the largest fall in growth since October.

This miss on quarterly growth followed marginal expansion in the services sector which grew just 0.1% on the quarter which came alongside a 0.2% contraction in the production sector. On the services front, just 11 out of 20 sub-sectors grew, with growth being led by professional, scientific and technical activities whose output rose 0.7% on the quarter. Wholesale and retail trade also expanded 0.6% – figures which follow last month’s retail sales print which pointed to a ide of 1.9% over the quarter.

Elsewhere, the construction sector saw growth of 0.8% – a positive sign following three consecutive quarters of contraction. Nonetheless, while the sector registered a rise in quarterly output, annualised output remains 0.4% lower than the same quarter a year ago.

The figures mark the first full quarterly growth data covering the new Government. Speaking on the figures, the Chancellor Rachel Reeves conceded that she was “not satisfied”. She continued by saying that “we are going to deliver growth through investment and reform to create more jobs and more money in people’s pockets, get the NHS back on its feet, rebuild Britain and secure our borders in a decade of national renewal.”

Despite the miss on growth, markets have seemingly not adjusted their pricing in relation to interest rate expectations for the BoE’s next MPC meeting on 19thDecember. For example, money markets are implying that there is around a 15% chance of a 25bps cut at the December meeting, unchanged from yesterday.

When accounting for inflation, real GDP per head fell by 0.1% in Quarter 3 2024, and is unchanged compared with Q3 2023. These figures again highlight the UK’s “Productivity Puzzle”.

In postwar Britain, the rate of growth in productivity has steadily decreased. For example, between 1946 and 1976, annual UK productivity grew at 3.6% ahead of subsiding to 2.3% in the thirty years between 1976 and 2007. Though, while the rate of growth in productivity was easing, productivity was still rising. Indeed, such growth in productivity meant that a typical worker in 2007 was producing twice as much each hour as that of typical worker in 1977.

In the 12-year period between 2007 and 2019 however, annual UK productivity fell 0.2%, with pronounced declines being seen between 2007 to 2012 when non-oil GVA fell 15%.

When accounting for the subsequent five-year period, UK productivity grew at just 0.2% each year Between 2007 and Q2 2024.

This trend has led to a gulf between the UK and other major economies. For example, according to the most recent data from the ONS (2023), UK productivity (accounting for purchasing power parity) lagged some 18% behind the US, while being 15% and 14% behind that of Germany and France, respectively.

Following the release of this morning’s growth figures, attention this afternoon will turn to across the Atlantic with all eyes on US Retail Sales at 14:30. Here, the general market expectation is pointing to a monthly increase of 0.3%, down marginally from last month’s 0.4% print.