4. Growth in production and construction output increases as services sector growth slows

Growth in the output measure of gross domestic product (GDP) increased by 0.5% in Quarter 1 (Jan to Mar) 2019 (Figure 2). Production output increased by 1.4% in the first quarter of 2019, within which manufacturing output increased by 2.2%. Services output growth slowed to 0.3% in Quarter 1 2019, while construction output increased by 1.0%. Output of the agriculture, forestry and fishing sector fell by 1.8%, providing the only negative contribution to growth.

Figure 2: Growth in services output drives GDP growth in Quarter 1 2019 UK, Quarter 1 (Jan to Mar) 2017 to Quarter 1 (Jan to Mar) 2019 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). Chart shows contributions to real GDP growth. Download this chart Figure 2: Growth in services output drives GDP growth in Quarter 1 2019 Image .csv .xls

Services output increased by 0.3% in Quarter 1 2019, following the comparatively strong performance in the second half of 2018 (Figure 3). This easing has also been seen in the recent Markit UK Services Purchasing Manager’s Index (PMI) for March 2019, which recorded a contraction in services sector activity for the first time since 2012 and cited how “corporate clients had opted to delay spending in response to political uncertainty”.

Following growth of 0.3% in Quarter 4 (Oct to Dec) 2018, there was a sharp pickup in the output of the wholesale, retail and motor trades industries, which increased by 1.2% in the first quarter of 2019. This increase broadly reflects growth in retail sales, which increased by 1.6% in the first three months of 2019.

As outlined in the Retail sales, Great Britain: March 2019 publication, the growth in Quarter 1 2019 reflects an increase in the quantity bought across all stores, with the exception of department stores and household goods stores. However, the pickup in retail sales in Quarter 1 2019 is at odds with a variety of external survey evidence, including both the British Retail Consortium and Bank of England’s Agents’ Summary Survey, with the latter attributing the weakening demand for household goods to the relatively subdued UK housing market, in addition to the recent political uncertainty.

Professional, scientific and technical activities fell by 0.6% in Quarter 1 2019. However, this decrease broadly reflects a fallback following particularly strong growth throughout the second half of 2018. In addition, financial and insurance services output continued to fall in Quarter 1 2019, decreasing by 0.4%. The quarterly fall predominantly reflected a fall in financial service activities, which has not contributed positively to growth since Quarter 1 2017. It should be noted that data content in these industries is comparatively low in early estimates. This fall is also consistent with the Bank of England’s Agents’ Summary Survey, which attributed some of the recent decline in financial services to weaker demand, reflecting recent political uncertainty as well as worries around trade tensions between the US and China.

Figure 3: Service sector growth slows despite strengthening in wholesale, retail and motor trade UK, Quarter 1 (Jan to Mar) 2017 to Quarter 1 (Jan to Mar) 2019 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). Chart shows contribution to services growth. Download this chart Figure 3: Service sector growth slows despite strengthening in wholesale, retail and motor trade Image .csv .xls

Following a weak picture in Quarter 4 2018, in which all of the four main areas of production experienced a fall in output, there was a pickup in Quarter 1 2019. Production output increased by 1.4% (Figure 4), predominantly driven by manufacturing output, which increased by 2.2%, its fastest rate since Quarter 3 (July to Sept) 1988.

This pickup in manufacturing was also captured in the recent Markit UK Manufacturing PMI for March 2019, which recorded a 13-month high in manufacturing activity due to “companies stepping up production to build-up inventories in advance of Brexit and to also meet rising inflows of new work”. The rate at which inventories increased was the highest for any G7 country.

Figure 4: Increase in production output in Quarter 1 2019 driven by recovery in manufacturing UK, Quarter 1 (Jan to Mar) 2017 to Quarter 1 (Jan to Mar) 2019 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: Increase in production output in Quarter 1 2019 driven by recovery in manufacturing Image .csv .xls

Recently, there has been much interest in the extent to which stock building has been taking place in the UK. This refers to when a business increases its holdings of intermediate and/or finished goods, which is typically in response to unexpected shocks to demand. There have been concerns that there may be disruptions at the UK border, and there has been external survey evidence that points to a sharp uptick in businesses increasing their inventories of stocks.

For instance, the latest Bank of England’s Agents’ Summary shows that “around half of all respondents had been building inventories as part of their contingency planning for Brexit”, while almost one-third of respondents to the latest Decision Maker’s Panel Survey reported an increase in stock levels. It is difficult to unpick how much of the increase in manufacturing output in Quarter 1 2019 might reflect the increase of domestic output produced by UK manufacturers in response to the stockpiling demands by UK and/or foreign manufacturers.

There has been widespread strength across the majority of manufacturing industries in Quarter 1 2019 (Figure 5), with the most notable growth occurring in the relatively volatile pharmaceuticals sector which increased by 9.4% in the first quarter. This was mainly driven by growth in exports of pharmaceutical products, some of which was likely in anticipation of the UK’s original exit date from the European Union at the end of March 2019.

Figure 5: Manufacturing growth driven by widespread increases, including growth in pharmaceuticals UK, Quarter 4 (Oct to Dec) 2018 and Quarter 1 (Jan to Mar) 2019 Source: Office for National Statistics Notes: Q1 refers to Quarter 1 (Jan to Mar) and Q4 refers to Quarter 4 (Oct to Dec). Download this chart Figure 5: Manufacturing growth driven by widespread increases, including growth in pharmaceuticals Image .csv .xls

The manufacturing of food and drink recovered from a fall in Quarter 4 2018, driven by an increase in the manufacturing of alcohol products, reflecting strong export demand. The manufacture of transport equipment also recovered somewhat from a fall in the final quarter of 2018, increasing by 0.9%. The Quarter 1 growth in this sector has been driven by increases in the manufacturing of aircraft and other transport equipment.

Mining and quarrying production also bounced back in Quarter 1 2019, increasing by 2.0% following a fall in the previous quarter. This increase stems predominantly from relatively new oil fields maturing in production capacity, which has led to an increase in output in the first three months of 2019.

In contrast, electricity, gas, steam and air as well as water supply and sewerage production both fell for the second consecutive quarter in Quarter 1 2019. Warmer than average temperatures in Quarter 1 2019 lowered the demand for electricity production, while the 1.6% fall in water supply and sewerage reflected broad-based weakness across the sector in Quarter 1 2019. More information on the movements in the output production industries can be found in the Index of Production, UK: March 2019 release.

Following a weak end to 2018, construction output recovered in the first quarter of 2019, increasing by 1.0%. However, this reflects to some extent the volatile monthly movements in recent months. Following a fall of 2.5% in December 2018, construction output recovered in January and February 2019, with growth of 3.3% and 0.5% respectively. The latest figures show that construction output fell by 1.9% in March 2019 (Figure 6).

The quarterly increase in total construction output in Quarter 1 2019 resulted from the 2.9% growth in repair and maintenance work, which also recovered following a weak end to 2018. Elsewhere, growth in new construction work was flat in Quarter 1 2019, with falls in new commercial construction work offset by an increase in infrastructure output. The latest Bank of England’s Agents’ Summary Survey notes how “heightened caution around business investment has resulted in some commercial developments being paused or delayed”.