4. Growth in construction and manufacturing output picks up in Quarter 3 2018, while services growth slows

Growth in the output measure of gross domestic product (GDP) strengthened to 0.6% in Quarter 3 (July to Sept) 2018. Construction output growth continued to pick up following a weak start to the year, while quarterly output in the manufacturing sector rose for the first time in 2018. Growth in services output slowed to 0.4%, but remained the largest positive contributor to GDP growth in Quarter 3.

In the construction industry, output continued to recover following a weak start to 2018, which was in part impacted by the adverse weather. Output increased by 2.1% in Quarter 3 2018 – the fastest increase since Quarter 1 (Jan to Mar) 2017. The quarter-on-quarter growth was driven by a 1.7% increase in construction output in September, helped by a 2.8% increase in all new work that more than offset the month-on-month fall of 0.3% in repair and maintenance work. The increase in new work in September 2018 stemmed from notable increases in infrastructure and total new housing work, which contributed 0.90 and 0.85 percentage points to overall construction growth in September 2018 respectively. The pickup in Quarter 3 also reflected base effects in April 2018, where output growth was flat (Figure 3).

Figure 3: The strength in Quarter 3 construction growth stemmed largely from a weak April outturn UK, January 2018 to September 2018 Source: Office for National Statistics Notes: Periods with no columns represent zero growth. Download this chart Figure 3: The strength in Quarter 3 construction growth stemmed largely from a weak April outturn Image .csv .xls

Output in the production sector rose by 0.8% in Quarter 3 2018, following a decline of 0.8% in Quarter 2 (Apr to June). While output increased across all four main production sectors, around half of total production growth in Quarter 3 was driven by manufacturing. Following two consecutive quarters of decline in the first half of 2018, manufacturing recovered in Quarter 3 to rise by 0.6%. While this pickup is somewhat at odds with the latest evidence from the Bank of England’s Agents’ summary survey – which saw both domestic and export manufacturing output ease in Quarter 3 – it is more in line with the September reading for the Markit Manufacturing Purchasing Manager’s Index (PMI), which saw an acceleration in output growth to a four-month high.

The recovery in manufacturing reflects a pickup across a number of industries following a weak Quarter 2 (Figure 2), although it was predominantly driven by transport equipment and specifically motor vehicle production. Transport equipment rose by 2.3% in Quarter 3, reflecting both a bounce back from a 2.7% fall in the previous quarter and strength in UK car exports in Quarter 3. This is consistent with the latest trade figures released today, which show a 5.8% increase in the export of machinery and transport equipment in Quarter 3, particularly to non-EU countries.

Figure 4: The strength in Quarter 3 manufacturing largely reflected a rebound in growth in a number of industries following a weak Quarter 2 UK, Quarter 2 2018 and Quarter 3 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 strength in Quarter 3 manufacturing largely reflected a rebound in growth in a number of industries following a weak Quarter 2 Image .csv .xls

Despite the pickup in the production of transport equipment in the latest quarter, the underlying longer-term trend is one of decline (Figure 5). Compared with the same quarter a year ago, production of transport equipment fell by 0.2% in Quarter 3 2018, marking its first such decline since the global financial crisis. This longer-term weakness in car production in part reflects softer growth in domestic demand, at a time when household real incomes have been squeezed. The weakness in car production is broadly consistent with the latest data from the Society of Motor Manufacturers and Traders (SMMT), which noted a 16.8% fall in UK car manufacturing in September 2018 compared with the same period in 2017. The SMMT attributed the slowdown to a “turbulent first three quarters as global trade tensions, model changes and uncertainty over diesel and Brexit were exacerbated by testing backlogs due to new emissions regulations”.

Figure 5: The underlying trend in the production of transport equipment is weak, despite a pickup in the latest quarter UK, Quarter 1 2012 to Quarter 3 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 5: The underlying trend in the production of transport equipment is weak, despite a pickup in the latest quarter Image .csv .xls

Meanwhile, output in the energy supply sector rose by 1.9% in Quarter 3. Energy supply production had been heavily affected by weather conditions in the first half of 2018, with production boosted by the cold weather in Quarter 1, followed by some element of bounce back and unusually warm temperatures in Quarter 2. The Quarter 3 outturn sees production in energy supply return to levels broadly in line with those seen at the end of 2017. In other sectors, mining and quarrying output rose for the third consecutive quarter (1.7%) and output in the water and waste management sector rose by 0.3%.

In the services industries, output growth eased to 0.4% in Quarter 3 2018, contributing 0.3 percentage points to growth in GDP. This is in line with average rates seen since the start of 2017, following the relatively strong growth of 0.6% in Quarter 2 2018, which largely reflected a pickup in retail trade, driven by buoyant food and drink sales as consumers took advantage of the warmer weather and the World Cup. The strength in retail trade in Quarter 2 also partly reflected a pickup from the weak start to the year, which was adversely affected by poor weather conditions as consumers stayed indoors and avoided the high street.

Following solid growth of 2.0% in Quarter 2 2018, growth in retail trade slowed to 1.1% in Quarter 3. While this drove the slowdown in total services growth, the sector still made a positive contribution in Quarter 3 (Figure 6). The overall contribution from the wholesale, retail and motor trades sector was weighed down by weakness in motor trades, which fell by 1.9% in Quarter 3. This marked the weakest quarterly growth rate in motor trade services since Quarter 4 (Oct to Dec) 2012 and continues a declining trend seen since the start of 2016. The slowdown in motor trade services – which measures domestic consumption – appears notably more pronounced than the slowdown in production of transport equipment, suggesting that global demand for UK car exports has helped support production.

Figure 6: The slowdown in Quarter 3 services growth was driven by retail trade, although it still contributed positively UK, Quarter 2 2018 and Quarter 3 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 6: The slowdown in Quarter 3 services growth was driven by retail trade, although it still contributed positively Image .csv .xls

In Quarter 3, the largest growth contribution came from the transport, storage and communications sector (0.2 percentage points). Computer programming continues to perform particularly well, with growth strengthening to 2.2% in Quarter 3. Despite growth remaining elevated, there are signs that the recent strength is easing. Compared with the same quarter a year ago, growth slowed for the fifth consecutive quarter (4.4%), following a period of double digit growth throughout most of 2016 and 2017.