Chart of the week: Business expectations suggest GDP soft patch won't last
Business outlook one year ahead as % balance. Real GDP in % YoY three-month rolling average. Monthly data. Sources: Lloyds Bank, ONS
Not quite a hat trick
Upside surprises to key UK housing and consumer surveys this week (see bottom paragraph) had opened the door to a hat-trick of positive data surprises. Unfortunately, it was not to be - as October GDP data fell short of expectations. Bloomberg consensus had looked for a 0.1% MoM rise in UK economic activity in October to correct for the 0.1% drop in September. Instead, output slipped a further 0.1%. Although monthly data can be volatile and are often revised, and hence should be taken with a pinch of salt, the miss will add to fears that UK momentum is stalling again after an ultra-strong first half. It will also increase calls for the Labour government to regain control of the pro-growth narrative upon which it had campaigned and won the election in July.
No silver linings
The GDP details show a broad-based softness across all major sectors. Linked to weak global demand and trade, industrial production contracted by 0.6% MoM – the drop is consistent with the recent trend in manufacturing PMIs for major economies. In contrast to the recent strength in UK construction PMIs, however, construction output shrank by 0.4% MoM. Output in domestic-oriented services moved sideways in October for the second month in a row – consensus had looked for a 0.1% rise. The downside surprise in services is consistent with the budget-related drop in consumer confidence during October. If services continue to follow the trend in confidence, we can look forward to an uptick in November and December consistent with the easing of policy uncertainty. On a 3m/3m basis, real GDP rose by 0.1%. Comparing the three months to October to last year, output rose by 1.1%.
Small forecast downgrades, but outlook remains positive
Following the downside surprise in October, we reduce our 4Q24 projection from 0.4% QoQ to 0.2% and our 1Q25 call from 0.4% to 0.3%. This reduces our 2024 forecast from 0.9% YoY to 0.8% and our 2025 call to 1.5% from 1.6%. We keep 2026 unchanged at 1.9%. For our detailed forecasts see link below. Despite the recent softness in GDP prints, strong balance sheet fundamentals, fading headwinds and policy tailwinds continue to point to sustained medium-term growth. In our chart of the week, we show that business expectations – which lead GDP by six months – continue to rise on trend and point to healthy GDP growth in 2025.
Positive news recap...
Yesterday, the closely watched RICS housing market survey surprised strongly to the upside – with the headline price balance rising to 25% in November from 16% in October and above consensus expectations of 19%. The survey showed improvements in both new buyer enquiries and new instructions. Furthermore, consumer confidence data published overnight also surprised slightly to the upside – the headline balance rose to -17 in December from -18 in November versus expectations of no change. Although confidence remains below its recent high of -13 in June, the recent positive trend suggests sentiment is recovering from the -21 low in October linked to budget uncertainties.
