ECONOMIST REACTION: Is the UK entering a slowdown?

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Is the UK economy about to slow down?
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Scott Barbour/Getty Images

The UK’s GDP figures for Q3 just came out and they’re weaker than expected.

The UK recorded a growth rate of 0.5% from Q2 to Q3, below the 0.6% analysts expected, and the 0.7% recorded three months earlier.

The growth we did see was overwhelmingly driven by the services sector. Both manufacturing and construction dragged on the figures.

The dominance of the services sector is causing some worries that the UK is seeing a classic British recovery – heavy on consumer spending, low on investment.

Is the UK economy entering a more prolonged slowdown? Or will the steady growth seen over the last two years continue?

We rounded up the reaction to Tuesday’s GDP numbers from analysts to find out.


Samuel Tombs, chief UK economist, Pantheon Macroeconomics

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Pantheon Macroeconomics

“In one line: The start of a pronounced slowdown…

Looking ahead, the latest surveys suggest that construction output should spring back in Q4. But the current strength of the pound points to a deepening of the recession in the manufacturing sector, which is twice the construction sector’s size. Moreover, the services sector is likely to slow too as the fiscal squeeze intensifies, jobs growth fades and inflation rebounds. As a result, we think the consensus view that annual GDP growth will moderate from 2.5% to just 2.4% in 2016 doesn’t fully acknowledge these constraints; we expect a more pronounced slowdown to 1.5% in 2016.”


Dominic Bryant, BNP Paribas

“With a weight of 78.6% in GDP, service sector output is a key driver of the overall path of GDP growth. This rose by 0.7% q/q in Q3, up slightly from 0.6% in Q2. August service sector output was, however, flat m/m. The ONS has assumed a 0.3% q/q increase in September. This might appear at odds with the fall in the service sector PMI that month, but the two indicators often diverge on a monthly basis. Moreover, September retail sales were much stronger than expected, suggesting some support from the consumer.

Overall, growth of 0.5% q/q remains solid and probably a little above the trend growth rate for the economy. External headwinds suggest the possibility of a further slight moderation in growth over the next couple of quarters leaving growth in 2016 around trend.”


Kallum Pickering, senior UK economist, Berenberg

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ONS, Berenberg

“The economy is at risk to shocks if the structural issues holding construction and manufacturing back aren’t dealt with…

Both manufacturing and construction are still below pre-crisis levels and need structural reform to boost the supply side of the market. Otherwise, the prospects of a stronger pickup in output are nowhere in sight. In the construction industry, firms are experiencing increased costs pressures coming from labour and materials shortages. For production: It’s biggest component, manufacturing, not only suffers from weakness in global trade, but, more precisely, a lack of investment and a lack of willingness of firms to base production in the UK. This stems from, among other things, a chronic uncertainty in the UK’s future energy supplies due to lack of investment in energy capacity. Taken together, this implies that if a decline in UK services were to take place, the UK economy would be vulnerable.”


James Sproule, chief economist, Institute of Directors

“Although today’s figures undershot expectations, the news is still broadly positive. Rising wages are underpinning consumer spending, and growth in the dominant service sector continues to be healthy. The construction sector was weaker than hoped, but it is an inherently volatile, and small, part of the economy.

The challenge now for the UK is to achieve sustainable growth which is based on improving productivity. Demographic trends and technological change mean that businesses will have to be agile to respond quickly to changing consumer demand to find the kinds of productivity gains in the future which we have been used to in the past.”


Rob Wood, UK economist, Bank of America Merrill Lynch

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BAML

“The big question for growth is whether latent world worries spread, potentially via elevated uncertainty, into UK consumer and corporate spending plans. We see little sign of that so far, and with the worries seeming to fade a little in recent weeks we still look for growth to return to a 0.6%/0.7% qoq pace through next year.

Overall, we expect continued solid momentum in the UK. Mortgage interest rates remain low, the brake on the housing market looks to have been wearing off this year, and the UK’s main trading partner, the Eurozone, is doing better than a couple of years ago.”


Vicky Redwood, Chief UK economist, Capital Economics

“Admittedly, the overall economic recovery still has some obstacles to overcome in the coming quarters, including uncertainty ahead of an EU referendum and a renewed fiscal squeeze (although this may be less severe than planned in the short term if the Chancellor is forced to spend more as a result of the tax credit saga). So GDP growth next year probably won’t be spectacular (we are penciling in 2.3%).

However, we doubt that Q3’s slowdown means that the economy has now exhausted its potential for strong growth. Indeed, we still think that GDP growth will bounce back to 3% or so in 2017.”


Francois Cabau, Andrzej Szczepaniak and Fabrice Montagne, Barclays

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ONS, Barclays

This release suggests that the UK economy’s momentum has begun to ease in light of increasing uncertainty and a weaker global environment, as we expected, but remains decent. The composition of value added remains excessively tilted towards services, with manufacturing posting a decrease in Q3. This decline echoes the EEF, the manufacturing representative body, which more than halved its manufacturing growth forecast in its Q3 Outlook Report released on Monday 7 September 2015; at the start of the year it was at 1.7% for 2015 whereas now it is at 0.7%…

Historically, manufacturing has been muted in its contribution to economic growth, with the bulk coming from services.