UK Reaction: Small rebound in April GDP following March drop, momentum remains weak
- Monthly GDP rose by 0.2% in April on the month, in line with Refinitiv consensus estimates of 0.2%. This follows March’s 0.3% decline in output.
- A rebound in car sales and consumer facing services (CFS) saw output rise. Output also continues to be weighed by strike action, but with fewer days lost to action overall in April, output in some strike-impacted sectors such as education picked up.
- Services output rose by 0.3% (consensus 0.3%); industrial production (IP) declined by 0.3% (consensus -0.1%); construction output declined by 0.6% (consensus 0%).
- Today's data comes in line with our expectations for growth to essentially fluctuate around zero over the coming months. Survey indicators continue to suggest faster growth, but do not capture impact of strikes and construction output.
- We expect the Bank of England (BoE) to hike by 25 basis points (bps) on 22 June and again in August bringing Bank Rate to 5%.
Monthly GDP rose by 0.2% on the month in April following it's 0.3% decline in March, in line with consensus estimates of 0.3% GDP growth. This leaves GDP just 0.3% above its level prior to the pandemic. The rebound was driven by a rebound in services - particularly CFS, which were up 1% on the month following the 0.8% decline seen in March. Output also continues to be weighed by strike action, but with fewer days lost to action overall in April output in some strike-impacted sectors such as education picked up. The increases in services output were offset by declines in IP and construction.
Overall, services output rose by 0.3% (consensus 0.3%) following March's 0.3% decline. IP output fell by 0.3% (consensus -0.1%) following 0.7% seen last month and construction output declined 0.6% on the month (consensus 0%) following 0.2% growth last month.
Services output continues to be weighed by strike action but a decline in the number of days lost to strike action (257,000 in April vs 553,000 in March) allowed services output to partially rebound. Activity still remains weak, with the service sector declining by 0.1% in the three months to April 2023. April saw industrial action take place across sectors including education, the civil service, rail and healthcare; the level of output in these sectors remained subdued. The largest contribution to negative growth in services was a drop in health and social work (-0.9%) as junior doctors were on strike for four days in April (compared to the three days of walkouts seen in March) whilst education output picked up by 0.8% as teachers walked out for one day in April, compared to two in March. Overall, the largest contributor to the pick-up in services was a 1% rise in retail trade, driven by a 3.9% rebound in car sales following declines of 4.1% seen in March. CFS, which have lagged behind picked up by 1% on the month in April, reversing all of the 0.8% drop seen in March.
Manufacturing fell by 0.3% on the month (consensus -0.2%). Falls in output were broad-based - seen in eight out of 13 sub-sectors. The largest contributors to the declines were the manufacture of pharmaceuticals (-5%) and computer, electronic and optical products (-3.8%). Declines in construction output were driven by a fall in new work (-1%). Sectoral surveys suggest that demand for new work is weakening amidst a continued slowdown in private housing and customers remain hesitant to start new projects due to economic concerns.
Today's data comes in line with our expectations for growth to essentially fluctuate around zero over the coming months, despite the continued improvement in activity measured by survey indicators suggesting faster growth. These activity indicators do not accurately reflect the impact of strikes and industrial action on output and also fail to capture the construction output, which is likely to remain weak and so continue to overestimate the scale of the pick-up in output. Looking ahead, we continue to expect GDP to decline by 0.1% in Q2. Strikes continued to hit output in May and the additional Bank Holiday for the King's coronation, likely depressed output by around 0.3 percentage points. In addition, consumers remain under pressure from rising rates and despite small improvements, consumer confidence remains weak. We see GDP growth averaging 0.2% this year and 0.6% next year.
We expect the BoE to hike by 25bps in its meetings both next week on 22 June and in August, bringing Bank Rate to 5% where we expect it to pause. Following yesterday's labour market data confirming the continued strength of the labour market, we continue to see the risks to this call tilted to the upside.