United Kingdom: Growth rebounds in Q1, although uptick is likely to be temporary
Growth accelerated to 0.5% in quarter-on-quarter terms in Q1 2019 (Q4 2018: +0.2% quarter-on-quarter), according to preliminary data released by the Office for National Statistics (ONS). The reading matched market expectations and growth consequently rose from 1.4% to 1.8% in year-on-year terms. However, the reading was driven in part by firms increasing stocks in preparation for a possible no-deal Brexit, which spurred the largest expansion in the manufacturing sector in over three decades. This dynamic is unlikely to be repeated in the second quarter.
Looking at expenditure components, private consumption was buoyant (Q1: +0.6% qoq; Q4: +0.3% qoq), likely supported by rock-bottom unemployment and solid wage growth. Government consumption also lent support (Q1: +1.4% qoq; Q4: +1.3% qoq), potentially reflecting stockpiling within the public sector. Moreover, fixed investment was up 2.1% (Q4: -0.6% qoq), on higher public and business investment. In particular, business investment returned to growth following four consecutive quarters of contraction, although again this could have been partially linked to stockbuilding.
The external sector subtracted 2.2 percentage points from growth in Q1, down sharply from the 0.2 percentage-point subtraction in Q4. This was largely driven by a surge in imports (Q1: +6.8% qoq; Q4: +2.1% qoq), as a significant portion of stockpiling came from abroad. Exports, meanwhile, were flat (Q4: +1.6% qoq), with lower services exports offsetting higher goods exports.
Looking ahead, the economy is likely to grow at a more moderate pace over the next few quarters as the stockpiling effect unwinds and Brexit uncertainty continues to delay firms’ investment decisions. Nevertheless, the strong labor market should support private consumption, while the government’s fiscal stance will become less restrictive. The evolution of Brexit is the key risk to the outlook.
According to James Smith, an economist at ING:
“We still think there is the potential for a correction in overall economic growth in the second quarter. Manufacturing contributed 0.2 percentage points to first-quarter GDP growth, and this is unlikely to be repeated over the coming months – especially given the uncertain outlook for global growth.”