UK National Accounts, 1st Quarter 2022 – GDP & Investment: The Office for National Statistics (ONS) released data on the UK National Accounts this morning. This showed no change to the estimate of GDP growth of +0.1% compared to the previous quarter, leaving the UK economy and just +0.2% higher than a year earlier. The UK economy is still -0.5% smaller than before the Covid pandemic (for the quarterly figures, this is taken to be the 4th quarter of 2019).
Given that the economy also had quarter-on-quarter growth of +0.1% at the end of 2022, it does look as if we have avoided a recession (defined as two consecutive negative quarters for GDP) but our colleagues at Oxford Economics are still expecting growth to be marginally negative int eh 2nd quarter given the extra bank holiday in May and the various bouts of industrial action.
Although the overall path for GDP has not changed from the previous estimate, there have been some small adjustments to the various elements. Manufacturing output has been edged up to growth of +0.6% for Q1-23 (previously +0.5%) but the construction sector has been revised down to growth of +0.4% (from +0.7%). Growth of +0.1% for the service sector is unchanged from the last estimate – this growth is driven by the information & communication and administrative & support services industries.
The ONS reports increases in 8 of the 13 sub-divisions of the manufacturing sector in the 1st quarter of the year, with the strongest growth in the manufacturing of basic metals & metal goods (this is one combined industry) and in computer, electronic & optical products. The weakest sub-sector of manufacturing was pharmaceuticals.
As we don’t have the full breakdown of output for manufacturing, perhaps the most important news in this release is the update on the investment figures, although we still don’t have the breakdown by industry (this has been promised for the Autumn). Total business investment has been revised up and is now estimated to have been +3.3% higher than in the previous quarter (Q4-22) and +5.8% above the level a year earlier (Q1-22). The analysis by asset type shows that spending on “ICT & Other Machinery” has also been revised up and grew by +20.8% compared to the previous quarter and by +4.7% above the level of a year earlier.
The spectacular quarter-on-quarter growth rate is probably due to companies taking advantage of the ending of the super-deduction allowance which expired at the end of the 1st quarter of 2023 (this scheme specifically supported spending on this asset type); there may also be a distortion to the seasonal adjustment of this data. If we look at the rolling 4-quarter totals (effectively the rolling annual total), total business investment increased by +8.7% while spending on “ICT & Other Machinery” grew by +11.4%.
You can download the ONS Statistical Bulletin for the National Accounts from their website at https://www.ons.gov.uk/releasecalendar (30 June) or request it from MTA.
Bank of England’s Agents’ Summary of Business Conditions, Q1-2023: To the surprise of no-one, the Bank of England’s Monetary Policy Committee (MPC) voted to increase the Bank Rate last week; the slightly unexpected aspect is that the 7-2 vote was for a rise of 50 basis points to 5.0%. Since their last meeting, there have been two releases of data on inflation and wages and markets had penciled (inked might be a better description) in an increase in interest rates since the first of those and the shock news that inflation had not changed in May only made a rise in Bank Rate more certain.
The future path remains to be seen, with markets suggesting rates could go as high as 6%, although the MPC is still expecting inflation to fall “significantly” during the rest of this year. Much will depend on how rapidly inflation falls and whether the UK labour market eases over the summer. A fall in inflation in the July figures is inevitable given lower energy prices – they are likely to be below the cap even after it falls with effect from July – but the key measure will be food prices and the impact of rising wages (driven by a shortage of people) on core inflation (the headline less energy, food and alcohol/tobacco).
For us, the most interesting element of the raft of supporting documents released in conjunction with this meeting is the quarterly report from the Bank of England’s Agents who meet with businesses around the country to provide feedback to the Committee. The overall context is one of modest recovery in economic activity with slightly improved consumer and business confidence.
The Agents reported that manufacturing output had stabilized with improving demand and an easing of supply chain constraints. Output was supported by a modest improvement in exports, especially to the USA and China – interestingly this is a different view from that in the latest PMI data (see our international economic news item for more on that). Demand for aerospace and defence companies were reported to be good and output of the UK semi-conductor industry was strong; overall, UK automotive production was benefiting from the greater availability of electronic components.
Investment intentions remain subdued thanks to higher investment costs, a lower return on capital in some cases and the on-going uncertainty about the economic outlook. The constraints on investment vary by industry so while the Agents note that machinery and vehicles investment was often subject to delivery delays, the building and construction sectors are being held back by higher material prices and planning delays.
You can find the Bank’s Agents Summary with more details on their report at https://www.bankofengland.co.uk/agents-summary/2023/2023-q2 with the minutes of the MPC meeting available at https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/june-2023.
CBI Industrial Trends Survey, June 2023: The latest results from the CBI Industrial Trends Survey (ITS) show a reduction in manufacturing output over the 3 months to June* although at a slower pace than in the previous survey. Output fell in 12 of the 17 sub-sectors with the largest contributions to this decline coming from the mechanical engineering (machinery) and food & drink groups.
Expectations for output over the coming 3 months* have returned to positive territory following the negative recorded in the previous survey, but this is far from a convincing recovery and is still below the long-run average for production expectations.
However, there has to be a doubt about whether this can be achieved given that total order books are rated “below normal” at around the same level as in the May* survey and, again, below the long-run average. Within this, export order books are the main problem as the balance here edged weaker compared to the previous survey and finished at their weakest position since the February 2021 survey.
Stocks of finished goods were seen as being above “adequate” and in increasing slightly from the previous survey, ticked above the long-run average, although not to a significant extent.
* Note that although this survey is dated June, the data collection took place between 25th May and 13th June so the results really cover the 3-month periods from March to May (past) and June to August (future).You can get the Press Release of the CBI ITS from their website at www.cbi.org.uk/media-centre (21 June) or request it from MTA (we can also provide a summary of the results).