By Conor Lambe, Chief Economist at Danske Bank
The UK economy began 2019 in a much better way than it ended last year, according to data released by the Office for National Statistics (ONS) last week which showed that real GDP grew by 0.5 per cent in the first quarter of the year. That compares with a miserly 0.2 per cent in the final quarter of 2018 and was in line with the average rate of quarterly economic growth since 1990.
Household spending grew by 0.7 per cent – the fastest rate since the beginning of 2017 – and after falling in all four quarters last year, business investment increased in the first three months of 2019. However, net trade dragged on the overall rate of economic growth due to a particularly large increase in imports.
Delving into the detail behind these headline numbers raises some interesting questions. Here are five that jumped to mind for me when looking at the data.
Q1. What impact did stockpiling have on the economy?
Given the risk of a no-deal Brexit occurring on 29th March, business surveys suggested that many firms were building up stock levels in the run up to the end of March to try and mitigate the disruption that leaving the EU without a deal would have caused to their supply chains. This activity is evident in the inventories part of the GDP data.
When the adjustments made to the inventories numbers are stripped away, the figures showed that firms increased their stock by over £5 billion in real terms in the first quarter of the year. In addition to stockpiling, it’s also likely that some business brought forward purchases planned for later in the year to the first quarter in an attempt to avoid Brexit-related disruption.
This activity can also be seen by looking at the growth of the sectors of the UK economy. The manufacturing sector experienced a marked bounce back with the manufacture of pharmaceuticals, metals and food – all products likely to have been among those most in demand for stockpiling or early purchase purposes – increasing in the first quarter of the year.
Q2. Can we expect to see similar activity in the run up to the new Brexit date in October?
With Brexit now potentially delayed until 31st October, it’s possible that we could see more stockpiling or businesses buying goods ahead of plan later this year. Obviously it will depend on developments in the Brexit process over the coming months. But, it will also depend on how businesses behave over this period.
For perishable goods, such as food, businesses will have to use that stock and run down their inventories. In that case, if a no-deal Brexit remains a risk as we approach the end of October, these firms may decide to build up their stocks again at that time.
But for other items that don’t have an expiration date, like metal, machine parts or electrical components, while businesses will almost certainly use some of that stock now, they may decide to hold some of it in reserve to prevent them possibly having to build up inventories so sharply again in just a few months’ time.
Q3. What drove the increase in household spending at the start of the year?
It’s possible that there was some Brexit-related stockpiling by households, or that consumers brought forward purchases they had planned for later in the year, but I would say this type of activity was more prevalent among businesses. Therefore, the higher rate of household spending growth was more likely driven by the ongoing recovery in consumers’ purchasing power.
With the UK employment rate currently the joint-highest on record and the unemployment rate lower than it has been since the 1970s, wage growth has been on an upward trajectory. This has been accompanied by a gradual decline in inflation. Therefore, people’s pay packets are now carrying a bit more punch and that appears to have driven the rise in spending we saw at the start of the year.
Q4. Are businesses set to start investing again?
Despite business investment returning to growth at the start of 2019, it’s very unlikely that businesses will now go on an investment splurge. Brexit uncertainty is still looming as large as ever. A withdrawal agreement has not yet been approved and the negotiations on the long-term relationship between the UK and the EU have not even begun. With no clarity on the way trade will take place in the future, or on the access businesses will have to workers from the EU, firms are still understandably reluctant to press ahead with big, strategic investment projects. Therefore, business investment will likely remain subdued throughout the rest of this year.
Q5. Will economic growth slow in the coming quarters?
The rate of economic growth is expected to slow from the 0.5 per cent experienced in the first quarter.
Businesses will run down at least some of the stock they accumulated in the early part of the year over the coming months, removing this temporary boost to growth. Business investment is likely to remain subdued and while household spending power looks set to continue its recovery, consumers will still face some pressures.
The monthly growth rates of GDP published by the ONS also showed that the economy expanded in January and February, but contracted slightly in March suggesting that activity was not picking up momentum as we moved through the first quarter.
In conclusion, the economy started the year better than it ended last year but unusual activity linked to firms’ Brexit preparations likely provided a temporary shot in the arm. With Brexit uncertainty persisting and the global economy still facing risks, the UK economy continues to face challenges. Economic growth will likely slow and so the first quarter numbers do not change my view that 2019 is likely to be another year of modest economic growth in the UK.
This article was published in The News Letter on 14 May 2019.
