GDP first quarterly estimate, UK: April to June 2018

• UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.4% between Quarter 1 (Jan to Mar) 2018 and Quarter 2 (Apr to June) 2018.

• The services industries and construction increased in Quarter 2 2018, by 0.5% and 0.9% respectively; while production decreased by 0.8%.

• Household spending grew by 0.3% and business investment increased by 0.5% between Quarter 1 and Quarter 2 2018.

• The trade deficit widened by £4.7 billion in Quarter 2 2018 (in current price terms), with net trade dragging on GDP growth as a result.

• Growth in compensation of employees slowed in Quarter 2 2018 to 0.6%, but continued to contribute positively to GDP growth.

Gross domestic product (GDP) growth is the main indicator of economic performance. There are three approaches used to measure GDP; the output approach, the expenditure approach and the income approach.

Further information on all three approaches to measuring GDP can be found in the short guide to national accounts (PDF, 317KB).

Data in chained volume measures within this bulletin have had the effect of price changes removed (in other words, the data are deflated), with the exception of income data, which are only available in current prices.

Today’s provisional estimate of quarterly GDP is the first under the new publication model, which has been in effect from July 2018. By pushing back the publication of the first estimate of quarterly GDP by two weeks, it is expected that this will lead to improvements in the accuracy and reliability of this initial estimate. It has also allowed for a timelier publication of the expenditure and income measures of GDP. Newly-published estimates of the monthly path of GDP are also available.

Revisions

In line with the National Accounts Revisions Policy the period open for revision in this release is Quarter 2 (Apr to June) 2018 only.

UK gross domestic product (GDP) is estimated to have increased by 0.4% in Quarter 2 (Apr to June) 2018, up from 0.2% in the previous quarter (Figure 1). This pick-up in growth following a weak Quarter 1 (Jan to Mar) was in line with market expectations.

GDP rose by 1.3% in Quarter 2 2018 compared with the same quarter a year ago.

As previously reported, the adverse weather conditions in Quarter 1 had an effect on some areas of the economy, although its overall effect appears so far to have been limited. Today’s figures show that there has been some unwinding of the impacts in affected industries. The pick-up in Quarter 2 reflects, to some extent, consumers taking advantage of the warm weather and World Cup celebrations. However, Figure 2 shows that abstracting from these quarterly movements, the underlying trend in real GDP is one of slowing growth. The UK economy grew by 0.6% in the first half of 2018, compared with the second half of 2017 – continuing the declining trend seen since the second half of 2014.

The implied GDP deflator represents the broadest measure of inflation in the domestic economy, as it reflects changes in the price of all goods and services that comprise GDP, including the price movements in private and government consumption, investment and the relative price of exports and imports. In the year to Quarter 2 2018, the GDP deflator increased by 1.7%, slightly stronger than the 1.6% seen in the year to Quarter 1. This increase reflected strengthening price growth in all expenditure components except household consumption.

The slowing of the household consumption deflator from 2.1% in the year to Quarter 1 2018 to 1.9% in the latest quarter largely reflects a fall-back in growth in line with more typical quarterly movements. This follows strong rises in both Quarter 4 (Oct to Dec) 2017 and Quarter 1 2018, in implied prices in the miscellaneous goods and services category, largely linked to financial services, which can be volatile.

The output measure of gross domestic product (GDP) grew by 0.4% in Quarter 2 (Apr to June) 2018, driven by stronger growth in both the services and construction industries (Figure 3). These rises were offset by a fall in production, driven by manufacturing and energy supply, while growth in both mining and quarrying, and waste management continued.

While its overall effect was limited, the adverse weather in Quarter 1 (Jan to Mar) had some impact on the economy, particularly in construction, energy supply and some areas of retail. Figure 3 shows how some of these effects have unwound in Quarter 2 – although it is hard to distinguish the effect of a bounce back from the boost given by the better than usual weather in Quarter 2.

In the construction industry, the latest figures show that output recovered to rise by 0.9% in Quarter 2 2018 – contributing 0.1 percentage points towards GDP growth. However, growth remains below the quarterly average for 2017 (1.1%). Driving the growth in Quarter 2 was non-housing repair and maintenance (up 3.9%) and new work public housing (up 10.4%) – contributing 0.6 and 0.4 percentage points respectively towards total construction output. Partly offsetting this, new private housing fell by 2.4%, marking the weakest quarterly growth since Quarter 2 2012. This soft outturn follows a period of strong growth in private housebuilding, with the sector making the largest positive contribution to construction growth in 2017.

While there was some anecdotal evidence from a small number of businesses suggesting that the favourable weather in June had helped boost construction activity, overall it is difficult to determine if this is a result of the warm weather or a bounce back effect following a weak Quarter 1 2018. Some external surveys, such as the Construction Purchasing Managers’ Index (PMI) noted the resumption of housebuilding activity in April 2018 following a weather-affected March. The survey also noted weather-related improvements for commercial building and civil engineering activity. However, the strength in construction output in Quarter 2 did not solely reflect a bounce back from Quarter 1 due to poor weather. The weakness in Quarter 1 2018 was also due to a sharp fall in output in January 2018, as previously published. Therefore, the overall impact of the weather on construction output can be difficult to quantify.

Today’s new Index of Production figures show that output in the production sector fell by 0.8% in Quarter 2 2018 – the weakest quarterly growth since Quarter 4 (Oct to Dec) 2012. This was driven by a 0.9% fall in manufacturing and a 2.7% fall in energy supply, while mining and quarrying, and waste management production both rose by 0.7% and 1.9% respectively. Following the cold weather boost to energy supply in Quarter 1 2018 – which offset some of the effects of depressed activity in other areas of the economy – energy supply fell by 2.7% in Quarter 2. This was due to warmer weather conditions, which led to a fall in electricity and gas production in April and May. Energy supply remains 1.4% below the level recorded in Quarter 4 2017, prior to the unusual weather conditions.

The quarterly growth in mining and quarrying follows a particularly strong Quarter 1 after the Forties Pipeline shutdown in December 2017. Driving the Quarter 2 growth was an 9.1% rise in crude petroleum and natural gas production in April due to fields coming out of maintenance. However, further maintenance in May and June subdued the quarterly growth.

The quarterly decline in manufacturing primarily reflected a weak April outturn, with output falling by 1.2% in the month, before recovering to rise by 0.6% in May and 0.4% in June. The quarterly fall was driven by declines in the manufacture of basic metals and metal products (negative 4.6%), other machinery and equipment (negative 4.5%), and transport equipment (negative 1.6%). This marks the second consecutive quarterly decline in manufacturing output, which has not been seen since Quarter 1 2016.

Consistent with the latest trade figures, the weakness in manufacturing in Quarter 2 largely reflects an easing in manufacturing export growth. This is consistent with external evidence, with the British Chambers of Commerce’s (BCC) Quarterly Economic Survey noting that domestic manufacturing sales improved in Quarter 2 while manufacturing exports slowed. Survey evidence from the Bank of England also suggests that the slowdown in manufacturing exports reflects an easing in global demand for products such as UK-produced vehicles and materials for processing destined for China.

Growth in services output increased to 0.5% in Quarter 2 2018, contributing 0.4 percentage points to growth in GDP. This marked the strongest quarterly growth in services since Quarter 4 2016 – services growth has been relatively subdued since the start of 2017, with an average quarterly growth rate of 0.3%. This slowdown in 2017 was driven by a decline in output from consumer-focused industries. This strength in Quarter 2 2018 reflects a pick-up in a number of services industries, particularly wholesale and retail trade (Figure 4), which had been identified as being affected by the adverse weather earlier in the year.

Retail trade fell by 0.3% in Quarter 1 2018, driven by a sharp decline in petrol sales with the adverse weather conditions keeping shoppers indoors. This was partly offset by a boost to online retail spending, with department stores seeing particularly strong growth in their internet sales. Following this weakness in Quarter 1, the retail industry bounced back in Quarter 2, with output rising by 2.1% – the highest quarterly growth rate since Quarter 1 2004, which also saw growth of 2.1%.

The June retail sales figures showed that this strength was driven by buoyant food and drink sales, with consumers taking advantage of the warm weather and World Cup celebrations. However, the month of June saw a fall in overall retail sales volumes, reflecting a decline in non-food sales due to these same factors. This narrative is corroborated by external survey evidence, with the British Retail Consortium’s (BRC) Retail Sales Monitor for May and June linking the warm weather, World Cup festivities, two Bank Holidays and a Royal Wedding to increased demand for items such as beer, barbecues, summer clothing and garden furniture, but that sales of many other items fell in the month of June.

Meanwhile, transport, storage and communications rose by 1.3% in Quarter 2 2018, following modest growth of 0.1% in Quarter 1. There was no notable effect due to the weather in this sector with the pick-up due to particular strength in computer programming, motion pictures, and warehousing and support activities for transportation. Growth in business services and finance – which had been the largest positive contributor to services growth for the previous three quarters – slowed in Quarter 2. This was driven partly by a fall in architectural and engineering activities, which saw its growth fall to negative 0.4% in Quarter 2 from 3.8% in Quarter 1 – when it was the largest contributor to total services output.

The expenditure measure of gross domestic product (GDP) increased by 0.4% in Quarter 2 (Apr to June) 2018. Household consumption, government consumption and gross capital formation all contributed positively to growth, while net trade subtracted from growth (Figure 5).

Growth in household consumption strengthened slightly in Quarter 2 2018, although it remained relatively subdued at 0.3%. Quarter-on-year-ago growth in household consumption – which has been declining since mid-2016 – fell to 1.1% in Quarter 2, the weakest since Quarter 1 (Jan to Mar) 2012.

Gross fixed capital formation (GFCF) is estimated to have increased by 0.8% in Quarter 2 2018, driven by rises in business investment (0.5%) and private dwelling investment (1.1%). While private dwelling investment rose in Quarter 2, growth slowed compared with Quarter 1 (1.5%). This is broadly in line with construction figures for new private housing, and private housing repair and maintenance, which together fell by 1.0% in Quarter 2.

The modest rise in business investment followed a weak Quarter 1, in which business investment fell by its sharpest rate since Quarter 4 (Oct to Dec) 2016. This rise in the latest quarter saw business investment return to virtually the same level seen in Quarter 4 2017. Growth in business investment has been subdued in recent periods, consistent with external surveys, which have suggested that investment intentions have been dampened by Brexit-related economic and political uncertainties. According to the latest Bank of England Agents’ summary survey (PDF, 99KB), Brexit uncertainty continued to weigh down on investment in Quarter 2, particularly for “some medium- to larger-sized businesses” and those “with a greater international focus”.

While GFCF contributed 0.1 percentage points to GDP growth in Quarter 2 2018, gross capital formation (GCF) – which includes changes in inventories and acquisitions less disposals of valuables – contributed 0.9 percentage points. This notable difference is due mainly to a sharp rise in non-monetary gold (NMG) in the quarter, particularly in April and May. NMG is recorded within the national accounts as a change to valuables, within GCF. However, movements in NMG do not affect headline GDP as an equivalent impact is recorded in trade in goods and services.

Users should be aware that a number of adjustments have been applied to the change in inventories component in Quarter 2 2018 to help balance the different measurement approaches to GDP. The estimates should be considered accordingly. Please see the Quality and methodology section for further information about the balancing adjustments applied to this dataset.

As such, these movements are also reflected in the latest trade figures for Quarter 2 2018, which showed that the trade deficit (in current price terms) widened by £4.7 billion to 0.9% of GDP, compared with 0.7% in the previous quarter. This reflected a 2.0% fall in the value of exports and a 1.0% rise in the value of imports. While the widening of the deficit in Quarter 2 partly reflected trade in erratic commodities, such as non-monetary gold and aircraft, Figure 6 shows that the trade balance excluding erratics also saw a notable widening in the latest quarter. Movements in the trade balance in Quarter 2 were driven largely by a 12.5% fall in the value of car exports, the sharpest quarterly decline since Quarter 1 2009. This weakness in car exports is also consistent with the easing in manufacturing exports growth seen in Quarter 2.

Removing price effects, the volume of exports saw a sharper fall of 3.6% in Quarter 2, while imports fell by 0.8%. As a result, net trade subtracted from quarterly GDP growth for the first time since Quarter 4 2016 (subtracting 0.8 percentage points).

Nominal gross domestic product (GDP) grew by 0.7% in Quarter 2 (Apr to June) 2018, following growth of 0.8% in the previous quarter. This reflected slowing growth in both compensation of employees (CoE) and other income, and a fall in gross operating surplus.

CoE growth slowed to 0.6% in Quarter 2, which was the weakest growth since Quarter 4 (Oct to Dec) 2016. This slowdown reflected weaker growth in wages and salaries, offset by stronger growth in employers’ social contributions. The softer growth in wages and salaries is consistent with relative weakness seen in published Labour Force Survey employment data for the rolling three months ending May 2018, showing flat growth compared with positive growth recorded in the same period a year earlier.

Meanwhile, taxes less subsidies rose by 4.4% in Quarter 2. This was the strongest quarterly rise since Quarter 1 (Jan to Mar) 2011, and partly reflected a bounce back from a weak Quarter 1, which saw a 2.3% fall in taxes less subsidies.

Release content

All data in this bulletin are seasonally adjusted estimates. Non-seasonally adjusted data are available within the UK Economic Accounts (UKEA). These data can be downloaded directly from the UKEA dataset and on the UKEA main aggregates dataset table. Data published in the UKEA reflect data as published on 29 June 2018 and will be next updated on 28 September 2018 when the Quarter 2 (Apr to June) 2018 Quarterly national accounts release and UKEA will become consistent.

Blue Book 2018

The quarterly national accounts published on 29 June 2018 was consistent with the UK National Accounts, The Blue Book 2018, published on 31 July 2018.

Monthly GDP

Estimates of rolling three-month GDP and monthly GDP for June are available in the GDP monthly estimate, UK: June release.

Business investment

Further details on GFCF and business investment along with data for GFCF by sector and asset, revision triangles and a real time database were published on 10 August 2018. Changes for this release reflect the new publication model for business investment announced in the notice accompanying the Business investment in the UK: January to March 2018 revised results.

Index of Services

The Index of Services publication was published on 10 August 2018 and includes data for June 2018.

Index of Production

The Index of Production release was published on 10 August 2018 and includes data for June 2018.

Construction output in Great Britain

The Construction output in Great Britain publication was published on 10 August 2018 and includes data for June 2018.

UK trade

The UK trade release was published on 10 August 2018 and includes data for June 2018.

International Passenger Survey

The International Passenger Survey (IPS) is in the process of transferring data collection from paper forms to tablet computers. Initial analysis of the new data suggests there may be discontinuities arising from the change in mode of collection. These new data will not be used in headline trade or other national accounts estimates until we have produced a consistent time series on the new basis. More information is available in the Overseas travel and tourism release.

The Gross domestic product (GDP) Quality and Methodology Information report contains important information on:

• the strengths and limitations of the data and how it compares with related data

• uses and users of the data

• how the output was created

• the quality of the output including the accuracy of the data

The national accounts are drawn together using data from many different sources. This ensures that the national accounts are comprehensive and provide different perspectives on the economy, for example, sales by retailers and purchases by households.

Important quality issues

There are common pitfalls in interpreting data series and these include:

• expectations of accuracy and reliability in early estimates are often too high

• revisions are an inevitable consequence of the trade-off between timeliness and accuracy

• early estimates are based on incomplete data

Very few statistical revisions arise as a result of “errors” in the popular sense of the word. All estimates, by definition, are subject to statistical “error”.

Many different approaches can be used to summarise revisions; the “Validation and quality assurance” section in the Quality and Methodology Information report analyses the mean average revision and the mean absolute revision for GDP estimates over data publication iterations.

Reaching the GDP balance

The different data content and quality of the three approaches – the output approach, the expenditure approach and the income approach – dictates the approach taken in balancing quarterly data. In the UK, there are more data available on output in the short-term than in either of the other two approaches. However, to obtain the best estimate of GDP (the published figure), the estimates from all three approaches are balanced to produce an average, except in the latest two quarters where the output data takes the lead due to its larger data content.

Information on the methods we use for Balancing the output, income and expenditure approaches to measuring GDP is available.

Alignment adjustments, found in Table M of the first quarterly estimate of GDP datasets in this release, have a target limit of plus or minus £2,000 million on any quarter. To achieve a balanced GDP dataset through alignment, balancing adjustments are applied to the components of GDP as required. They are applied to the individual components where data content is particularly weak in a given quarter due to a higher level of forecast content, in this quarter inventories has been subject to balancing adjustments and the resulting series should be considered accordingly.

The size and direction of the quarterly alignment adjustments in Quarter 2 2018 indicate that in this quarter the level of expenditure is lower than the level of output and income is higher than the level of output. Table 1 shows the balancing adjustments applied to the GDP estimates in this publication.