UK reaction: Momentum easing

The latest growth figures suggest momentum is now starting to ease after a strong H1. Indeed, monthly activity showed that growth remained unchanged on the month in July – markets had expected a 0.2% month-on-month rise – after an equivalent reading in June. On a three-month-on-three-month basis, growth slowed to 0.5% in July, from 0.6% in Q2, and looks set to continue easing across the third quarter. Note quarterly growth will slow to around 0.3% in Q3, even if monthly activity increases by 0.2% in August and September, in line with our forecast, barring any revisions.

Looking at the breakdown, services activity continued to boost overall growth, rising by 0.1% on the month and 0.6% on a three-month basis. Within that so-called “white collar” services, such as IT & comms and admin services continued to rebound healthily, contributing 0.06 percentage points and 0.03ppt, respectively. And momentum increased in the distributive trade sectors, following a mixed summer, in part due to the weather. The latest data also showed some signs that households are feeling more confident in parting with their money, though they remain cautious. Indeed, consumer-facing services rose by 0.3% on the month in July, following a 0.7% decline in June, leaving activity in these areas up 0.1% on a three-month basis. We think consumption will continue to tick up, albeit slowly, over the remainder of the year, as falling interest rates boost confidence and bring down mortgage rates.

Activity in the production sectors, by contrast, declined. Indeed, industrial production fell 0.8% in July, wiping out all of June’s 0.8% rise, leaving growth down 0.1% on a three-month basis. The weakness in July was broad-based, with three of the four main sectors declining, though the largest contribution came from a 1% decline in manufacturing output. Admittedly, the drop in manufacturing activity in July did appear to be somewhat concentrated in volatile categories such as transport equipment, which can jump around due to its high-value nature. But the global backdrop is weak, pointing to a sluggish recovery at best, despite the recent strength in the S&P Global manufacturing PMI. Construction output, meanwhile, dropped by 0.4% in July, reflecting declines in both new work and repair & maintenance. That followed a solid 0.5% increase in June, however, so growth was still up 1.2% on a three-month basis. And falling borrowing costs, coupled with government initiatives should support the sector going forward.

Taking a step back, today’s data support our view that the pace of the recovery will ease in the second half of the year, now that much of the payback growth from H2 2023 and supply-side improvements has been worn out. We look for quarterly increases of around 0.3% in Q3 and Q4, in line with the message from the S&P Global composite PMI and the Lloyds’ Business Barometer, leaving GDP up 1.2% this year. For the Bank of England, easing momentum will add to the conviction that MPC was right to largely look through the strength in H1 and will add weight to the argument for further cuts going forward. We look for one further 25bp cut to Bank Rate in November, leaving the baseline interest rate at 4.75% by year-end.