UK Reaction: Recession on the horizon
• GDP fell by 0.3% in August following growth of 0.1% in July (revised down from 0.2%) below consensus expectations of GDP remaining flat.
• The fall in GDP was driven by sharp falls in industrial production and to a lesser extent a fall in services. Output in industrial production (IP) and services fell by 1.8% and 0.1%, respectively (consensus -0.1% and 0%). Construction output rose by 0.4% on the month (consensus 0.5%).
• The surprise decline in August growth means it’s now likely that the UK is already in recession. The additional UK bank holiday for the Queen's funeral means growth is expected to slip further in September and over the coming quarters we continue to expect growth to stall as consumption continues to slow on falling real income and rising borrowing costs.
• Despite the weakening economic outlook, we continue to expect the Bank of England (BoE) to step up the pace of their tightening in November. We now see rates reaching 4.25% below market expectations of Bank Rate peaking around 6%.
GDP fell by 0.3% in August following growth of 0.1% in July (revised down from 0.2%) below consensus expectations of GDP remaining flat. Alongside sizeable downward revisions to July’s numbers, this confirms the weakness in economy and the UK economy is likely in recession. Given the additional bank holiday in September for the Queen's funeral and the period of national mourning, output is likely to have fallen sharply in September. Updating our forecast for the updated growth figures point to a -0.6% decline in the third quarter. Over the three months to August, GDP also fell by 0.3% compared with the previous 3 months.
Falling output across industrial production and to a lesser extent services contributed to the decline in growth. IP declined further this month marking the third consecutive month of declines in this sector. IP fell sharply in August, down by 1.8% (consensus -0.1%), the largest decline since June 2021. This fall came alongside a significant downward revision to July’s estimates with growth revised down to -1.1% from -0.3% prior. The sharp falls in industrial production were driven by a 1.6% fall in manufacturing (consensus -0.1%), the largest decline in manufacturing since January 2021. Output in services fell by 0.1% a touch below consensus estimates of services remaining flat. Construction output rose by 0.4% (consensus 0.5%) with last month’s figure revised up to 0.1% from the previously estimated 0.8% decline. The increase in construction output was driven by an increase in new work projects. Within the services sector, the largest contributors to the decline health care and social work (-1.3%) and arts, entertainment, and recreation activities (-5.0%), these declines were partially offset by growth in professional, scientific and technical activities (1.2%). Output in consumer-facing services fell by 1.8% in August adding to evidence that rising prices are weighing on households and impacting spending behaviour.
Despite the weakening economic outlook, we continue to expect the BoE to step up the pace of their tightening in November as they consider the impact of the government’s fiscal package, the tight labour market and sterling weakness adding to inflationary pressures. We expect the BoE will hike rates by 75 basis points (bps) in their next meeting but if the Chancellor is not able to set out a credible fiscal plan, they may move 100bps. But we continue to expect the BoE will stop short of market rate expectations; markets see rates reaching close to 6% by mid-2023. We currently expect rates to peak at 4.25%.