4. Services and construction strengthen in Quarter 2 2018, while manufacturing drags on growth

The output measure of gross domestic product (GDP) grew by 0.4% in Quarter 2 (Apr to June) 2018, driven by stronger growth in both the services and construction industries (Figure 3). These rises were offset by a fall in production, driven by manufacturing and energy supply, while growth in both mining and quarrying, and waste management continued.

While its overall effect was limited, the adverse weather in Quarter 1 (Jan to Mar) had some impact on the economy, particularly in construction, energy supply and some areas of retail. Figure 3 shows how some of these effects have unwound in Quarter 2 – although it is hard to distinguish the effect of a bounce back from the boost given by the better than usual weather in Quarter 2.

In the construction industry, the latest figures show that output recovered to rise by 0.9% in Quarter 2 2018 – contributing 0.1 percentage points towards GDP growth. However, growth remains below the quarterly average for 2017 (1.1%). Driving the growth in Quarter 2 was non-housing repair and maintenance (up 3.9%) and new work public housing (up 10.4%) – contributing 0.6 and 0.4 percentage points respectively towards total construction output. Partly offsetting this, new private housing fell by 2.4%, marking the weakest quarterly growth since Quarter 2 2012. This soft outturn follows a period of strong growth in private housebuilding, with the sector making the largest positive contribution to construction growth in 2017.

While there was some anecdotal evidence from a small number of businesses suggesting that the favourable weather in June had helped boost construction activity, overall it is difficult to determine if this is a result of the warm weather or a bounce back effect following a weak Quarter 1 2018. Some external surveys, such as the Construction Purchasing Managers’ Index (PMI) noted the resumption of housebuilding activity in April 2018 following a weather-affected March. The survey also noted weather-related improvements for commercial building and civil engineering activity. However, the strength in construction output in Quarter 2 did not solely reflect a bounce back from Quarter 1 due to poor weather. The weakness in Quarter 1 2018 was also due to a sharp fall in output in January 2018, as previously published. Therefore, the overall impact of the weather on construction output can be difficult to quantify.

Today’s new Index of Production figures show that output in the production sector fell by 0.8% in Quarter 2 2018 – the weakest quarterly growth since Quarter 4 (Oct to Dec) 2012. This was driven by a 0.9% fall in manufacturing and a 2.7% fall in energy supply, while mining and quarrying, and waste management production both rose by 0.7% and 1.9% respectively. Following the cold weather boost to energy supply in Quarter 1 2018 – which offset some of the effects of depressed activity in other areas of the economy – energy supply fell by 2.7% in Quarter 2. This was due to warmer weather conditions, which led to a fall in electricity and gas production in April and May. Energy supply remains 1.4% below the level recorded in Quarter 4 2017, prior to the unusual weather conditions.

The quarterly growth in mining and quarrying follows a particularly strong Quarter 1 after the Forties Pipeline shutdown in December 2017. Driving the Quarter 2 growth was an 9.1% rise in crude petroleum and natural gas production in April due to fields coming out of maintenance. However, further maintenance in May and June subdued the quarterly growth.

The quarterly decline in manufacturing primarily reflected a weak April outturn, with output falling by 1.2% in the month, before recovering to rise by 0.6% in May and 0.4% in June. The quarterly fall was driven by declines in the manufacture of basic metals and metal products (negative 4.6%), other machinery and equipment (negative 4.5%), and transport equipment (negative 1.6%). This marks the second consecutive quarterly decline in manufacturing output, which has not been seen since Quarter 1 2016.

Consistent with the latest trade figures, the weakness in manufacturing in Quarter 2 largely reflects an easing in manufacturing export growth. This is consistent with external evidence, with the British Chambers of Commerce’s (BCC) Quarterly Economic Survey noting that domestic manufacturing sales improved in Quarter 2 while manufacturing exports slowed. Survey evidence from the Bank of England also suggests that the slowdown in manufacturing exports reflects an easing in global demand for products such as UK-produced vehicles and materials for processing destined for China.

Figure 3: Services and construction growth picked up in Quarter 2 (Apr to June) 2018, while manufacturing was weak UK, Quarter 1 (Jan to Mar) 2018 and Quarter 2 (Apr to June) 2018 Source: Office for National Statistics 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 3: Services and construction growth picked up in Quarter 2 (Apr to June) 2018, while manufacturing was weak Image .csv .xls

Growth in services output increased to 0.5% in Quarter 2 2018, contributing 0.4 percentage points to growth in GDP. This marked the strongest quarterly growth in services since Quarter 4 2016 – services growth has been relatively subdued since the start of 2017, with an average quarterly growth rate of 0.3%. This slowdown in 2017 was driven by a decline in output from consumer-focused industries. This strength in Quarter 2 2018 reflects a pick-up in a number of services industries, particularly wholesale and retail trade (Figure 4), which had been identified as being affected by the adverse weather earlier in the year.

Retail trade fell by 0.3% in Quarter 1 2018, driven by a sharp decline in petrol sales with the adverse weather conditions keeping shoppers indoors. This was partly offset by a boost to online retail spending, with department stores seeing particularly strong growth in their internet sales. Following this weakness in Quarter 1, the retail industry bounced back in Quarter 2, with output rising by 2.1% – the highest quarterly growth rate since Quarter 1 2004, which also saw growth of 2.1%.

The June retail sales figures showed that this strength was driven by buoyant food and drink sales, with consumers taking advantage of the warm weather and World Cup celebrations. However, the month of June saw a fall in overall retail sales volumes, reflecting a decline in non-food sales due to these same factors. This narrative is corroborated by external survey evidence, with the British Retail Consortium’s (BRC) Retail Sales Monitor for May and June linking the warm weather, World Cup festivities, two Bank Holidays and a Royal Wedding to increased demand for items such as beer, barbecues, summer clothing and garden furniture, but that sales of many other items fell in the month of June.

Figure 4: The pickup in services growth in Quarter 2 (Apr to June) 2018 was driven primarily by stronger growth in wholesale and retail trade, and transport, storage and communications UK, Quarter 1 (Jan to Mar) 2018 and Quarter 2 (Apr to June) 2018 Source: Office for National Statistics 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 4: The pickup in services growth in Quarter 2 (Apr to June) 2018 was driven primarily by stronger growth in wholesale and retail trade, and transport, storage and communications Image .csv .xls

Meanwhile, transport, storage and communications rose by 1.3% in Quarter 2 2018, following modest growth of 0.1% in Quarter 1. There was no notable effect due to the weather in this sector with the pick-up due to particular strength in computer programming, motion pictures, and warehousing and support activities for transportation. Growth in business services and finance – which had been the largest positive contributor to services growth for the previous three quarters – slowed in Quarter 2. This was driven partly by a fall in architectural and engineering activities, which saw its growth fall to negative 0.4% in Quarter 2 from 3.8% in Quarter 1 – when it was the largest contributor to total services output.