UK Q1 GDP (2nd release) – UK consumer back in recession
Market rumours prior to this mornings GDP release were for a soft number, and although the headline growth rate was unchanged at 0.5% q-o-q (1.8% y-o-y) the detail was undoubtedly weak. Consumer spending was shown to have fallen for a second successive quarter, placing the UK consumer technically back in recession, investment slumped and government spending remained a significant support to growth.
The only real plus point was the large positive contribution from net trade, although it is questionable just how much this reflects an improvement in export performance or the weakness in consumer spending dragging down imports.
Facts
UK Q1 GDP was unrevised at 0.5% q-o-q in Q1 2011, with the annual growth rate also unchanged at 1.8%. As suggested by recent monthly data, construction activity was revised up to show a slightly less pronounced decline over the quarter, while the estimate for production over the quarter was revised down. Service sector growth was still estimated at 0.9% q-o-q.
However, the expenditure breakdown of GDP provided for much more interesting, and worrying, reading. Consumer spending fell by 0.6% q-o-q, following a 0.3% reduction in Q4 2010, and is now also contracting on an annual comparison (spending was down 0.3% y-o-y in Q1 2011). While April’s data on retail sales suggest that spending may have improved at the start of Q2, the weakness shown in today’s GDP release provides further evidence that April’s retail sales reading was significantly influenced by one-off factors and that the underlying trend in consumer spending is very weak.
There was also a marked 7% decline in business investment during the first quarter of 2011, while the GDP data also provided further evidence that government spending remains a significant support to growth. Government expenditure increased by 1.0% in Q1 2011, contributing 0.2pp to the overall growth rate. By far the largest support to growth over the quarter, however, came from net trade, which contributed a quite staggering 1.7pp. However, it is clear from the breakdown that this as much reflected a slump in imports, possibly linked to the weakness of consumer spending, as it did an improvement in exports over the quarter. Imports fell 2.3% in Q1 2011, following a 3.2% increase in the final quarter of 2010, while export growth accelerated to 3.7% q-o-q from 1.7% in Q4.
Implications
Although net trade made a long-awaited significant contribution to growth in the first quarter of 2011, an accelerated decline in consumer spending and slump in business investment mean that the details of today’s GDP data are undoubtedly soft. Indeed, the contribution of net trade is most certainly flattered by the effects of weak consumer spending on imports, while the durability of strong export growth must be questionable given recent indicators (for example from manufacturing PMI readings) that global growth may be easing off.
The weak trend in consumer spending, however, has the clearest implications for growth later in the year. Although a rebalancing of the UK economy is undoubtedly necessary, consumer spending still contributes around 63% of GDP and so some growth in this area will be necessary if GDP is to even match (let alone exceed) the modest growth rate recorded in Q1. The outlook for consumer spending was identified as a risk to growth by MPC member Paul Fisher in a recent speech (23 May), and is a major factor which we believe will see interest rates kept on hold throughout the rest of the year.
Bottom line
UK GDP was unrevised at 0.5% q-o-q in Q1 2011, although the detail of the release was weak with consumer spending falling for a second successive quarter.
HSBC Global Research