2. GDP

Growth of UK gross domestic product (GDP) is estimated to have slowed to 0.2% in Quarter 4 (Oct to Dec) 2018, unrevised from the previous estimate.

Growth in Quarter 3 (July to Sept) 2018 has been revised up slightly to 0.7%, where some of this activity is likely to have reflected one-off effects of the warm weather and the World Cup. In comparison with the same quarter a year ago, UK GDP increased by a revised 1.4%, continuing the relatively subdued performance of late (Figure 1).

More timely figures are available on the UK economy, which cover the three months to January 2019. However, these monthly figures have not incorporated the revisions in the latest quarterly national accounts so this is not covered here.

Figure 1: Real GDP increased by an unrevised 0.2% in Quarter 4 2018 UK, Quarter 1 (Jan to Mar) 2008 to Quarter 4 (Oct to Dec) 2018 Source: Office for National Statistics - Quarterly National Accounts: October to December 2018 Notes: Q1 refers to Quarter 1 (Jan to Mar), Q2 refers to Quarter 2 (Apr to June), Q3 refers to Quarter 3 (July to Sept), and Q4 refers to Quarter 4 (Oct to Dec). Download this chart Figure 1: Real GDP increased by an unrevised 0.2% in Quarter 4 2018 Image .csv .xls

UK GDP increased by an unrevised 1.4% in 2018, which is the weakest annual growth rate since the 2009.

One way of capturing the recent slowing in the UK economy is to look at forecast errors from those produced before the referendum on membership of the EU. Since Quarter 2 (Apr to June) 2016, the latest estimates show that UK GDP has now increased by a cumulative 4.3%. This compares with the cumulative 5.5% that was expected over the same period in the forecasts produced in March 2016 by the Office for Budget Responsibility (OBR), which had been conditioned on a vote to remain in the European Union.

That said, it is important to note that the outlook produced at the time would have been subject to uncertainty, while there would have also been subsequent unforeseen developments in the UK and global economy not factored into forecasts produced at that time.

There are also signs that global momentum has weakened recently. Figure 2 shows how the UK economy has performed compared with other G7 countries in the last few years.

In 2017, the UK was the only advanced economy not to experience a pick-up in growth, as the global economy recorded its strongest uptick in activity since 2011. As such, the UK was only the sixth-fastest growing G7 economy that year, slipping down these international rankings. In 2018, the majority of G7 countries – except the United States – experienced a loss in momentum.

The latest estimates show that the UK was only the fifth-fastest growing advanced economy in 2018, ahead of Japan and Italy – the latter entering a technical recession in the second half of the year. The latest Interim Economic Outlook (PDF, 532KB) produced by the Organisation for Economic Co-operation and Development (OECD) attributes the global slowdown to “high policy uncertainty, ongoing trade tensions and a further erosion of business and consumer confidence”. This chimes with the latest World Economic Outlook produced by the International Monetary Fund (IMF), which highlights trade tensions and financial market sentiment as risks to the global outlook.

Figure 2: The UK economy was the fifth-fastest growing G7 economy in 2018 with signs of a loss of momentum in the wider global economy G7 countries, real GDP growth, 2016 to 2018 Source: Office for National Statistics, Organisation for Economic Co-operation and Development Notes: All international estimates extracted from the OECD quarterly national accounts and are correct as of 26 March 2019. Download this chart Figure 2: The UK economy was the fifth-fastest growing G7 economy in 2018 with signs of a loss of momentum in the wider global economy Image .csv .xls

The implied GDP deflator represents the broadest measure of inflation in the domestic economy, reflecting changes in the price of all goods and services that comprise GDP. This includes the price movements in private and government consumption, investment and the relative price of exports and imports. In the year to Quarter 4 2018, it increased by 1.8%, up from the previous estimate of 1.6%. Revisions to exports prices in particular have meant that there have been upward revisions to the implied GDP deflator in all quarters. Nominal GDP growth slowed from 4.1% in 2017 to a slightly revised 3.3% in 2018, reflecting a slowing in real GDP growth and lower price inflation.

Output

The latest estimates reaffirm that there was a slowing in activity in the final quarter of 2018. Services output increased by 0.5% in Quarter 4 2018, revised up from 0.4%. However, annual growth for 2018 remains unchanged at 1.7% – the weakest it has been since 2011.

Production output declined by 0.8% in the final three months of the year, with a fall in output recorded across all four main areas of production. There have been some small revisions to the quarterly path of construction output throughout 2018. The overall impact shows a weaker picture for the year, with growth in construction output now estimated to have slowed to 0.3%. Figure 3 shows that the narrative for 2018 remains largely unchanged – the most notable development is the upward revision to GDP growth in the third quarter, principally reflecting revisions to government and other services.

Figure 3: There have been relatively minor revisions to the quarterly contributions of output components throughout 2018 UK, Quarter 1 (Jan to Mar) 2018 to Quarter 4 (Oct to Dec) 2018 Source: Office for National Statistics - Quarterly National Accounts: October to December 2018 Notes: Q1 refers to Quarter 1 (Jan to Mar), Q2 refers to Quarter 2 (Apr to June), Q3 refers to Quarter 3 (July to Sept), and Q4 refers to Quarter 4 (Oct to Dec). FQE refers to GDP First Quarterly Estimate. QNA refers to GDP Quarterly National Accounts. Components contributions may not sum to total due to rounding. Download this chart Figure 3: There have been relatively minor revisions to the quarterly contributions of output components throughout 2018 Image .csv .xls

Growth in services output has been relatively stable over 2018, but revised up slightly in the second half of the year, with the latest estimate showing an increase of 0.5% in Quarter 4, a slight easing from the previous quarter (Figure 4). This was evident in the December 2018 UK Services Purchasing Managers Index (PDF, 158KB), which noted that “Brexit-related concerns were a key factor weighing on business-to-business spending at the end of 2018”, as business activity rose at one of its slowest rates over the previous two and a half years.

Output of business and finance services increased by 0.4% in the fourth quarter, driven primarily by growth in professional services. This is weaker than our previous estimate of 0.6% in Quarter 4 2018. The Quarter 4 Bank of England Agents’ Summary of Business Conditions (PDF, 1.4MB) reports that demand for business and financial services continued to grow at a “modest pace”, which may be followed by a further slowing in the first quarter of 2019 as “businesses were likely to avoid completing large transactions close to the date of EU withdrawal”.

There have also been upward revisions to government and other services, specifically relating to estimates of health output. These volume estimates are based on a measure of output activity in the NHS, such as inpatient and outpatient attendances, where we have received updated estimates of such activity. There have also been revisions to transport, storage and communications throughout 2018, which reflect updated survey and administrative information.

More recent survey evidence points to a subdued picture for services in early 2019. The UK Services Purchasing Managers’ Index (PDF, 163KB) fell to its lowest level in over two years in January, showing only a slight pick-up in February. Survey respondents cited EU exit uncertainty had weighed on business activity, while there have been reports that “political uncertainty had encouraged delays to corporate spending decisions and a general rise in risk aversion among clients”. There was also evidence from the Confederation of British Industry that optimism in the services industries had deteriorated, falling sharply in the three months to February, which was pronounced in business and professional services.

Figure 4: Easing in service sector growth in Quarter 4 2018 UK, Quarter 1 (Jan to Mar) 2017 to Quarter 4 (Oct to Dec) 2018 Source: Office for National Statistics - Quarterly National Accounts: October to December 2018 Notes: Q1 refers to Quarter 1 (Jan to Mar), Q2 refers to Quarter 2 (Apr to June), Q3 refers to Quarter 3 (July to Sept), and Q4 refers to Quarter 4 (Oct to Dec). Components contributions may not sum to total due to rounding. Download this chart Figure 4: Easing in service sector growth in Quarter 4 2018 Image .csv .xls

In the production industries, output is now estimated to have fallen by 0.8% in Quarter 4 2018, where there have been declines across all four main areas of production (Figure 5) – the first time this has taken place since Quarter 1 (Jan to Mar) 2009.

There has been a weak picture in manufacturing throughout 2018 with falls in three of the four quarters of 2018. In particular, manufacturing output of transport equipment fell during 2018, which is also echoed in the recent Society of Motor Manufacturers and Traders survey, which reports that UK car production fell 18.2% in the year to January 2019, reflecting a decline in domestic and foreign demand. Manufacturing output fell by a revised 0.7% in Quarter 4 2018, with 9 out of the 13 manufacturing sectors experiencing a contraction in activity.

More timely information points to a subdued picture in early 2019. The UK Manufacturing Purchasing Managers’ Index (PDF, 149KB) slowed to a four-month low in February 2019, as new order inflows eased “amid signs of a slowing domestic market and a further drop in new export orders”, which was linked to a weaker global economy. However, there was also evidence that the improvement in February was in part reflecting “efforts to reduce backlogs of work and build stocks of finished products in advance of Brexit”.

Figure 5: Production output fell in Quarter 4 with output falling across all main production areas UK, Quarter 1 (Jan to Mar) 2017 to Quarter 4 (Oct to Dec) 2018 Source: Office for National Statistics - Quarterly National Accounts: October to December 2018 Notes: Q1 refers to Quarter 1 (Jan to Mar), Q2 refers to Quarter 2 (Apr to June), Q3 refers to Quarter 3 (July to Sept), and Q4 refers to Quarter 4 (Oct to Dec). Components contributions may not sum to total due to rounding. Download this chart Figure 5: Production output fell in Quarter 4 with output falling across all main production areas Image .csv .xls

There have also been revisions to mining and quarrying output as well as smaller revisions to electric, gas, steam and air production output throughout 2018. The upward revisions to oil production throughout the year reflects under-reporting of new oil fields from the Department for Business, Energy and Industrial Strategy (BEIS) in previous estimates. Water supply and sewerage output fell by 0.9% in Quarter 4.

Some revisions have been made to the quarterly path of construction output in 2018, which paint a slightly weaker picture for the year. Construction output fell by 1.5% in the first quarter of the year, when activity is likely to have been affected by adverse weather. Following two consecutive quarters of growth, output of the construction industry fell by 0.5% in Quarter 4 2018.

The Quarter 4 Bank of England Agents’ Summary of Business Conditions (PDF, 1.4MB) highlights that activity in the construction industry remains modest, while the UK Construction Purchasing Managers’ Index slowed in December 2018, with signs of heightened uncertainty weighing on new orders.

More timely survey information points to a further fall in activity in February 2019, with the latest UK Construction Purchasing Managers’ Index (PDF, 152KB) falling to its lowest level since March 2018, when the UK economy was affected by heavy snowfall. Survey respondents cited concerns about a lack of new projects to replace completed contracts, with anecdotal evidence that EU exit uncertainty had “slowed decision making on commercial projects” and that it had led to “subdued client demand so far this year”.

Expenditure

Private and government consumption contributed positively to GDP growth in Quarter 4 2018, partially offset by the negative contributions of gross capital formation and net trade.

Figure 6 shows how the economy has evolved in recent years, with the 2018 estimates largely unrevised. There has been a notable slowdown in the contribution of private consumption in the last couple of years. This in part reflects the effect of a squeeze in purchasing power from higher import inflation following the fall in the exchange rate after the referendum on membership of the EU. It also shows the positive contribution of gross capital formation in 2018, although the contribution of gross fixed capital formation was flat in 2018, which reflects a marked slowing from previous years.

Having provided a boost to GDP growth in 2017, net trade fell in 2018 – a possible reflection of the waning effects of sterling’s depreciation and a slowing momentum in the global economy.

Figure 6: The contribution of private consumption to annual GDP growth has eased in recent years UK, 2016, 2017 and 2018 Source: Office for National Statistics - Quarterly National Accounts: October to December 2018 Notes: Q1 refers to Quarter 1 (Jan to Mar), Q2 refers to Quarter 2 (Apr to June), Q3 refers to Quarter 3 (July to Sept), and Q4 refers to Quarter 4 (Oct to Dec). Components may not sum to total gross domestic product due to rounding and loss of additivity in data prior to open period. The statistical discrepancy is also not displayed. Download this chart Figure 6: The contribution of private consumption to annual GDP growth has eased in recent years Image .csv .xls

Household consumption increased by 1.8% in 2018, slowing over the last couple of years. This primarily reflects a slowing in how much households have spent on recreation and culture, and transport (Figure 7), though it should be noted that spending on recreation and culture in 2016 was at its highest point since 2009.

In Quarter 4 2018, growth in household consumption slowed slightly to 0.3%. Spending on housing and household goods and services were the main drivers in the latest quarter.

The latest GfK Consumer Confidence figures highlight that confidence continued to be somewhat subdued, as views on the general economy over the past 12 months and the economic outlook for the year ahead continues to weigh heavily. Visa’s UK Consumer Spending Index (PDF, 1.0MB) provides more timely information on household spending, with the latest figures showing that overall spending fell by 1.8% on the year in February 2019. This is the fifth consecutive month in which spending has fallen.

Having slowed through the second half of 2018, in part reflecting the pick-up seen over the summer because of the warm weather, the volume of retail sales increased by 0.7% in the three months to February 2019. The recent business surveys show a more muted picture, as the British Retail Consortium reported a slowing in the year to February where it is likely that uncertainty had driven a “cautious approach to retail spending”, while the Confederation of Business Industry reported that sales were flat on the year to February.

Figure 7: Private consumption growth slowed in 2018 UK, contributions to growth, 2017 and 2018 Source: Office for National Statistics - Quarterly National Accounts: October to December 2018 Download this chart Figure 7: Private consumption growth slowed in 2018 Image .csv .xls

Government consumption increased by 1.3% in the final three months of 2018, with a significant contribution from increased defence spending. Expenditure in these areas has been lower across this financial year compared with previous years. However, the latest estimates show that there has been a pick-up in such spend.

Business investment has now fallen for four consecutive quarters – the first such instance since 2009 – mainly driven by declines in transport equipment as well as IT equipment and other machinery.

The latest estimates show that there have been some upward revisions in the second half of 2018, with business investment now estimated to have fallen by 0.9% in Quarter 4. These revisions to the quarterly path have resulted in an upward revision to the annual figure with business investment falling 0.4% in 2018. The Bank of England Inflation Report (PDF, 4.2MB) states that this weakness appears to “primarily reflect Brexit and associated uncertainty”, also echoed in the Quarter 4 Decision Makers’ Panel, which highlights the UK's EU exit as one of the top sources of uncertainty.

The latest Deloitte CFO Survey (PDF, 899KB) reports that perceptions of economic and financial uncertainty continued to rise in the final quarter of 2018 while the outlook for capital expenditure has deteriorated. Recent analysis (PDF, 609KB) finds that “almost 70% of the slowdown” in business investment could be accounted for by EU exit. The findings from the latest Decision Makers’ Panel findings that the proportion of businesses for which the UK's EU exit was considered one of the main sources of uncertainty increased further in the three months to January 2019.

Figure 8 provides some historical context for the recent weakness in business investment, showing its path following each of the last three UK recessions. In contrast to previous episodes, it appears that businesses have held back on capital spending at a point in the cycle where previous historical episodes would point to a pick-up.

Figure 8: Business investment in previous UK recessions and recoveries UK, Quarter 1 (Jan to Mar) 2009 to Quarter 4 (Oct to Dec) 2018 Source: Office for National Statistics - Quarterly National Accounts: October to December 2018 Notes: Estimates of business investment prior to 1997 are indicative only due to the basic method of calculation and other limitations in the methods used for compiling this dataset. Download this chart Figure 8: Business investment in previous UK recessions and recoveries Image .csv .xls

Government investment increased by 0.5% in Quarter 4 2018, revised down due to updates from central government. There were also revisions to the quarterly path in 2018, partly reflecting revisions from local government due to updated data for Crossrail. Overall, this has led to an upward revision in general government investment growth figure to 1.5% in 2018.

Alignment adjustments and balancing adjustments are typically applied to the inventories component to help balance the different approaches to GDP. The adjustments to inventories in Quarter 4 2018 were larger than usual, reflecting weakness in the expenditure approach to measuring GDP.

There was a £4.2 billion increase in inventories in Quarter 4 2018, including these adjustments. However, excluding these adjustments, the estimates show a slight decrease of £1.2 billion in stocks being held by UK companies. This is in contrast to a range of business surveys, which have recently reported a marked increase in building up inventories in preparation for any potential disruptions to supply chains.

For instance, the latest UK Manufacturing Purchasing Managers’ Index (PDF, 149KB) points towards record-high levels of an expansion in input inventories, as “almost 70% of the companies offering a reason behind the build-up of stocks attributed to Brexit”. The latest Agents’ Update on Business Conditions also finds evidence that UK businesses are stockpiling in preparing for the UK's EU exit. Around two-fifths of those businesses that were preparing for the UK's EU exit reported to be building up their stocks of inventories, with some evidence pointing to contacts “building inventories of up to three-times normal levels”. That said, this was not necessarily expected to provide a boost to GDP growth, as many of those inventories had been imported.

There have also been revisions to the latest estimates of non-monetary gold (NMG), which is recorded within the national accounts as a change to valuables and in trade in goods. Movements in NMG do not affect headline GDP as these are recorded as equivalent offsetting impacts, but this is reflected in contributions to GDP growth. There was a sizeable export of NMG in Quarter 4 2018, reflected in an offsetting fall in the acquisition less disposal of valuables, which helps explain the size of the contribution of gross capital formation. Despite this NMG movement, net trade made a negative contribution to GDP growth in the last three months of 2018.

There have been notable revisions to the volume estimates of export and import flows through 2018, which in part reflect revisions to the International Passenger Survey (IPS) estimates on personal travel. The estimates in the first quarter of the year have been revised down, although there have been offsetting revisions through the rest of the year. This is reflected in the latest net trade contributions (Figure 9). The overall impact is that the narrative on external rebalancing is largely unrevised for 2018.

In its latest Economic and Fiscal Outlook (PDF, 3.7MB), the Office for Budget Responsibility cite the softening in world trade growth. There has also been a downward revision to its outlook for UK export market growth, as the weaker world trade picture has been concentrated in advanced economies, which comprise a higher share of UK exports.

Figure 9: Net trade contribution to GDP revised down in Quarter 4 2018 UK, Quarter 1 (Jan to Mar) 2017 to Quarter 4 (Oct to Dec) 2018 Source: Office for National Statistics - Quarterly National Accounts: October to December 2018 Notes: Q1 refers to Quarter 1 (Jan to Mar), Q2 refers to Quarter 2 (Apr to June), Q3 refers to Quarter 3 (July to Sept), and Q4 refers to Quarter 4 (Oct to Dec). Download this chart Figure 9: Net trade contribution to GDP revised down in Quarter 4 2018 Image .csv .xls

Income

Nominal GDP grew by 0.7% in Quarter 4 2018, revised up from 0.6% (Figure 10). There have been some revisions throughout 2018, which have resulted in an upward revision to nominal GDP growth for the year. The latest estimates now show that nominal GDP increased by 3.3% in 2018, still reflecting a slowing in growth from the previous year.

Growth in compensation of employees (CoE) slowed to 0.8% in Quarter 4 2018. This reflects a slowdown in the growth of wages and salaries, and a fall in employers’ contributions to private pension schemes following increases in the previous two quarters.

Gross operating surplus (GOS) has been revised in 2018 with the latest estimates showing a slowdown to growth of 0.1% – a weaker picture for the year. There have been revisions to the quarterly path throughout 2018 reflecting improved data on financial services and updated survey estimates, with today’s (29 March 2019) estimates showing an increase of 0.4% in Quarter 4. This is a marked upward revision from the previous estimate of a 0.8% fall. Other income increased by 1.4% in Quarter 4, in line with the quarterly profile of 2018.