UK economy bounces back in August

The UK economy expanded by 0.2% in August, returning to growth but failing to make up for the ground lost by a significant downturn in July (-0.6%), as an expansion in the services sector offset declines in production and construction. However, the poor start to the quarter coupled with a sharp drop in retail sales in September suggests growth in Q3 as a whole is likely to be close to zero. Labour market data also points to softening activity, though assessing current conditions has been made harder as the ONS transitions to a new methodology for its labour market statistics. The latest labour market release nonetheless points to a cooling labour market, with the employment rate and vacancies falling, and unemployment and inactivity rates ticking up. But confidence in the reliability of this data is low. Meanwhile, the Bank of England has expressed concern about the quality of the official data on wage growth, adding complexity to its next interest rate decision in November.

Summer blues?

A 0.4% m/m expansion in the services sector rescued the UK economy from two consecutive months of declining GDP as strength in the professional services, education and information & communication sub-sectors offset a drag from arts & entertainment (with an unwinding of July’s #Barbenheimer effect on cinema ticket sales possibly playing a role). Services activity offset falls elsewhere as a contraction in nine out of 13 manufacturing sub-sectors weighed on production, while heavy rainfall in August led to fewer new construction projects.

New experimental data on the labour market suggest a further slight rise in the unemployment rate and a slight fall in employment in June – August compared with the previous three months (75.7% vs 76.0%). The ONS have only one date point (July – September) to compare the experimental against the previous methodology: the experimental data shows an employment rate of 75.7% vs 75.5% for the old methodology, for example. This is consistent with concerns that the LFS may be understating the strength of employment, given trends in payroll data, for example. Further doubts have recently been expressed about the reliability of the ONS wage data, with the Bank of England noting that business surveys have recently been pointing to more modest wage growth. Understanding conditions in the labour market is fundamental for judging the extent to which the economy is slowing and, therefore, whether the Bank need to apply the brakes harder.

provided experimental estimates for the last two rolling quarters from July, which do show some slight differences from the previous estimates The total employment rate fell slightly to 75.7% in the three months to August (down by 0.3pp compared with the three months to May). The unemployment and inactivity rates ticked up by 0.2pp to 4.2%, and 0.1% to 20.9%, respectively. Nonetheless, the picture of a gradual easing of labour demand is also reflected in a decline in the total number of vacancies, which have fallen for 15 consecutive rolling quarters to 988,000 in the three months to September, down from over 1.3 million in the three months to May 2022.

The ONS’s latest earnings statistics show that year-on-year regular wage growth remains elevated. Private sector wage growth increased by 0.1pp compared with the three months to May to 8% in the three months to August (close to the fastest rates outside of the pandemic era). Public sector wage growth was also strong, boosted from one off payments to NHS staff and civil servants, which pushed the annual rate to 6.8%, the highest figure since records began in 2001. Taking inflation into account, real regular pay has turned positive in recent months, rising by 1.1% in the quarter to August (when adjusting for CPIH) or 0.7% (using our preferred CPI measure). Looking ahead, CBI surveys expect wage growth to ease over the next 12 months (from 5.9% in the year to September versus 4.5% in the 12 months to September 2024) suggest that salary pressures are softening, meaning that the Bank of England’s Monetary Policy Committee (MPC) is likely to keep interest rates at 5.25% at its next meeting on 2 November.

Altogether, recent indicators paint a picture of an economy that is slowing. Despite revisions to GDP data over the past three years which show the economy is substantially larger than we previously thought, they don’t alter the picture of a fairly subdued economic performance since the beginning of 2022. The latest GDP figures suggest that the economy is set to stagnate (or even shrink marginally) during the third quarter as September needs to see a robust expansion to keep GDP above its end-Q2 level (0.5% m/m or higher, barring any significant revisions).