UK GDP grew ahead of expectations in Q2 2023, thanks in part to a strong performance in June, underlining the resilience of the economy during the first half of 2023 in the face of rising prices and interest rates. A slowdown in the rate of inflation will support household incomes and spending during the second half of the year, but the economy is likely to remain stuck in a low gear as the impact of the higher interest rates continues to feed through. With wage growth and measures of core inflation high, further rate rises are likely.
Summer’s brief appearance boosted activity in June…
GDP grew by 0.5% m/m in June (versus consensus expectations of 0.2%), a surprisingly strong result, which followed a slight contraction in May (-0.1%). The production sector was the main driver of growth, thanks to a 2.4% jump in manufacturing output (-0.1% in May), led by the automotive and pharmaceutical sectors. Construction activity also rebounded (1.6%, from -0.3% in May). Growth in the services sector was more modest (at 0.2%), as rising spending on consumer services (0.5%) was offset by falling output in health services, reflecting the impact of public sector strikes.
A number of one-off factors probably supported activity in June. The return to a normal number of working days following the additional bank holiday in May was cited by businesses in several sectors as a reason for higher output. In addition, the warmest June since records began in 1884 appears to have buoyed activity in the hospitality, tourism and construction sectors (the opposite is likely to be the case in July, which was the sixth wettest on record). However, the strength of the rebound in June suggests that underlying demand in the UK economy also remained fairly resilient.
…and underlying growth proved resilient through Q2
The solid expansion in June lifted GDP growth for Q2 to 0.2% q/q, a slight acceleration compared with Q1 (0.1%). Output data highlighted particularly strong growth in manufacturing (1.6%), which was supported by an ongoing recovery in the automotive sector related to improvements in supply chains. An expansion in construction activity (of 0.3%) was driven by repair and maintenance (0.9%), which offset a fall in new work (-0.1%). Meanwhile, the services sector saw the slowest growth, with output up by just 0.1%. Business-facing sectors were among the weakest within services, with the biggest drag coming from falling output in professional, scientific and technical activities (-1%). Demand for administrative and support services also fell. However, consumer-facing services generally performed better (0.8%).
An improvement in the consumer sector was mirrored in the GDP expenditure breakdown. Household consumption returned to growth in Q2, rising by a robust 0.7%, following zero growth in Q1. Government consumption growth was also strong (+3.1%), despite recent industrial action. Business investment rose for second successive quarter in Q2, though this was driven by aircraft purchases, with other investment categories weakening.
The strong end to Q2 provides a good jumping off point for growth during Q3, which should also be flattered by a return to a normal number of working days within the quarter (following May’s additional bank holiday) and less disruption from public sector pay disputes. And with real household incomes set to improve in the second half of the year as inflation falls further, household spending should continue to support growth in the second half of the year.